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Capitalizing on the Capital Gains Deductions


Saskatchewan business owners and farmers may be missing out on significant tax savings. Since 1985, business owners have been able to reduce their personal taxes by accessing the enhanced capital gains deduction. For the 2015 taxation year, the capital gains deduction allows you to claim anywhere from $813,600 to $1,000,000, which can be used to offset capital gains incurred on the disposition of either qualified small business corporation shares or qualified farm property.

The personal tax savings of utilizing the capital gains deduction in Saskatchewan can be as high as $310,000, depending on your personal tax situation and what tax planning has been done in advance.  Clearly, this is an extremely valuable way of reducing personal tax, which is why ensuring you meet the requirements to qualify for the deduction on an ongoing basis is important. Also, in certain cases there may be an ability to access more than one individual’s capital gains deduction; potentially doubling or tripling family tax savings.​

What Are Qualified Small Business Corporation Shar​es?

In a non-farm scenario, the capital gains deduction for 2015 is $813,600 and is to be annually indexed to inflation. To take advantage of this deduction for shares in a non-farming corporation you must meet the following general criteria:

  1. You have owned the shares for at least 24 months
  2. The corporation is a Canadian-controlled private corporation
  3. At the time of sale, the corporation has more than 90% of its assets being used actively in the business in Canada
  4. Over the past 24 months, more than 50% of the corporation’s assets have been used actively in the business in Canada.

These last two criteria often cause the most confusion. In general, an active asset is needed in the business to generate the revenue whereas an inactive asset is one that the business does not require. A basic definition of inactive assets is “assets which are not required to operate the business.” For example, a GIC held within your business for investment purposes would likely be considered inactive. With careful planning, these inactive assets can be managed to ensure the shares qualify on an ongoing basis.

What is Qualified Farm Property?

The 2015 Federal Budget increased the capital gains deduction on qualified farm or fishing property to $1 million, effective for dispositions on or after Budget Day, April 21, 2015.

Qualified farm property includes four different types of properties on which the deduction can be used. These include: real property, an interest in a family farm partnership, shares in a family farm corporation and certain eligible capital properties, such as quotas. Each type of property has its own set of criterion which must be met in order to qualify for the use of the capital gains deduction.

Many Saskatchewan farmers plan on using their capital gains deduction on their farm land. Generally, if owned personally and the land has been actively farmed by the individual, their spouse, their parents or their grandparents, the farm land would likely qualify. However, in many circumstances, it may make sense to operate your farm as a partnership as opposed to a proprietorship which may allow you to take advantage of the capital gains deduction, particularly on the value of certain assets that may not otherwise qualify, such as inventory.

To take advantage of this deduction for an interest in a farm partnership or shares in a family farm corporation you must meet the following general criteria:

  1. The partnership or corporation has been in existence for at least 24 months
  2. Throughout any 24-month period, more than 50% of the partnership or corporation’s assets have been used principally in the business of farming in Canada
  3. At the time of disposition, at least 90% of the partnership or corporation’s assets are being used principally in the business of farming in Canada.

Regarding assets used principally in the business of farming, a common area of concern is farmland that is being cash-rented or crop-shared as opposed to actively farmed. Your advisor should be involved to ensure that all of the above criteria are met and that your assets qualify and will continue to qualify.

What do you need to know about the Capital Gains Deduction?

The criteria for qualifying for the capital gains deduction are complex and vary for each type of qualifying asset. The capital gains deduction presents many advantages and can lead to significant tax savings, therefore it is important to understand your options.

At MNP LLP we are able to meet with you to discuss your options and ensure you take advantage of all available tax minimizing strategies based on your personal objectives, whether they be in regards to succession planning, estate planning or the sale of your operations.

For further information, please contact Rashelle Sarauer, CPA, CA, at 306.664.8300 or [email protected], or your local MNP Tax Advisor.