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The Capital Gains Deduction. A Great Tax Deduction Just Got Better...


One of the more lucrative tax deductions utilized by individual taxpayers just got a boost. On January 1, 2014 the capital gains deduction will rise from $750,000 to $800,000. In 2015, the deduction will be indexed to inflation. The increase to the deduction is also available to individuals who have previously utilized the deduction and now may be able to claim the incremental deduction on qualifying future sales. The deduction of $800,000 translates into approximately $185,000 in tax savings in Manitoba. This benefit is even greater when owners have introduced family trusts as shareholders in their corporations, allowing multiple individual beneficiaries of the trust to claim the deduction. Overall, the increase is welcome news as more business owners follow through on their exit strategies.

Who Can Use the Deduction?

The capital gains deduction is available only to individuals; a company cannot claim it in the instance of an asset sale rather than a share sale. This means careful structuring of divestitures is imperative. It is important to note that the deduction applies only to the sale of the following:

Qualified Farm Property:
Farmland, shares of family farm corporations, interests in family farm partnerships and properties such as quota.

Qualified Fishing Property:
Certain real property and fishing vessels, shares of family fishing corporations or interests in family fishing partnerships.

Qualified Small Business Corporation Shares:
Shares of a private company (held for two years), more than 90% of the value of assets used in an active business in Canada at time of sale and during the two year period immediately prior to sale, more than 50% of the value of assets used in active business in Canada.

Still Eligible for the Deduction?

The rules concerning eligibility for the deduction are complex and must be reviewed periodically to ensure shares continue to qualify for the capital gains deduction. For example, over time companies may accumulate assets that are not required in the business such as investment assets, insurance policies and rental properties. Planning may need to be completed well in advance of a sale to remove these items tax effectively from the corporation so the shares qualify for the deduction.

Don’t leave your business to chance. If you aren’t sure whether your shares qualify for the deduction, or if you’re able to use the deduction to the greatest advantage, contact us to learn more.