Skip Ribbon Commands
Skip to main content

Strategic Planning to Get the Most out of Capital Gains Exemptions

18/12/2015


There are likely very few, if any, business owners who have not heard about the lifetime capital gains exemption. 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. With $1,000,000 on the line, this is certainly one of the most important tax deductions available.

What Are Qualified Small Business Corporation Shar​es?

In the case of a small business corporation, 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:

  • You have owned the shares for at least 24 months
  • The corporation is a Canadian-controlled private corporation
  • At the time of sale, the corporation has more than 90% of its assets being used actively in the business in Canada
  • 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 revenue, whereas an inactive asset is one that the business does not require for operations. 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. A corporate reorganization can also ensure the structure in place will meet the criteria for accessing the capital gains deduction, by transferring inactive assets to a separate entity.

Your exemption is limited to your total gains on qualifying property over your lifetime. However, you don’t have to claim the exemption all at once; you can carry forward any unused amount. In certain cases there may even be an ability to access more than one individual’s capital gains deduction on a sale of property; potentially doubling or tripling family tax savings.​ It is also important to note that the capital gains deduction can be claimed on internal transactions, in addition to the sale of eligible property. For example, where a shareholder transfers personally-held property to a corporation, he or she can do so at an amount greater than cost, sheltering the gain with the capital gains deduction and leaving them with an increased cost base in their shares.

Clearly, this is an extremely valuable way of reducing tax exposure, which is why ensuring you meet the requirements and understand the options available to you is important.
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 Loren Kroeker at 250.734.4330 or [email protected].