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Capitalizing on the Capital Gains Deduction


Saskatchewan business owners and farmers may be missing out on significant tax savings. Since 1985, the capital games deduction has provided business owners the opportunity to reduce personal taxes by accessing the enhanced capital gains deduction. It’s important to learn how you may be able to save money by capitalizing on the capital gains deduction.

The capital gains deduction allows you to claim a deduction of up to $750,000, 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 $750,000 capital gains deduction in Saskatchewan can be in the range of $100,000 to $300,000 depending on your personal tax situation and what tax planning has been done in advance. Clearly, this is an extremely valuable means to reducing personal tax and ensuring you meet the requirements on an ongoing basis is important. Also, in certain cases there may be an ability to increase the number of capital gains deductions to more than one person; potentially doubling, or tripling, the family tax savings.

What are Qualified Small Business Corporation Shares?

To take advantage of the $750,000 capital gains deduction, you must meet the following criteria

  1. You must have owned the shares for at least 24 months
  2. The corporation must be a Canadian controlled private corporation
  3. The corporation must have more than a minimum of 90% at the time of sale, and more than 50% over the past 24 months, of its assets being used actively in the business

This last criterion causes the most confusion. 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 to be inactive. With careful planning, these inactive assets can be transferred out of the corporation to ensure the shares do qualify. Being a complicated topic, be sure to consult your tax advisor for assistance.

What is Qualified Farm Property

Many Saskatchewan farmers plan on using their capital gains deduction on their farm land. Generally, if the farm land has been actively farmed by the individual, their spouse, their parents or their grandparents, the farm land would likely qualify.

Other not as commonly known qualified farm properties include an interest in a family farm partnership, shares in a family farm corporation and certain eligible capital properties like quotas. Possibly setting your farm up as a partnership may allow you to take advantage of the $750,000 capital gains deduction particularly on the value of certain assets that may not otherwise qualify, such as inventory. This is a topic we’ll cover in a future article.

What do you need to know about the Capital Gains Deduction?
  • The limit was increased from $500,000 to $750,000 on March 19, 2007
  • If you have claimed net investment losses or a business investment loss in the past you may not be able to access the full $750,000
  • In 1994, the general capital gains deduction was eliminated. At that time, some people may have used up to $100,000 to increase the tax cost on other assets (i.e. cabins, shares, etc). If so, they may only have $650,000 of capital gains deduction room remaining

As you can see, the capital gains deduction is a great opportunity to take advantage of, and not a topic to be taken lightly. At MNP, we are able to meet with you to discuss your options and ensure you take advantage of all available tax minimizing strategies.

For further information, please contact Jeff Henkelman, CA, Ron Friesen, CA or Jaymon Hill, CA at 306.665.6766.