The lifetime capital gains exemption is a special tax rule in Canada.
It allows private company owners to sell private company’s shares without attracting tax, saving people a significant amount of tax on the sale of their businesses. There are several rules and tests that a company has to meet in order for its shares to be eligible. Therefore advanced planning is critical.
Some of the basics on accessing the lifetime capital gains exemption (this is not meant to be an inclusive list) include:
- The company must be a Canadian Controlled Private Corporation (CCPC), meaning the corporation cannot be controlled by non-resident individuals.
- The individual(s) must have owned the private company shares for at least two years leading up to the sale.
- The capital gains exemption applies once in a lifetime and only to capital gains arising from the sale of small business shares or farm and fishing property. It is not available to share sales from corporations; only individuals can use the deduction. Therefore, if you’re selling the shares of an operating company from a holding company (as opposed to personally), the sale will generally not qualify for the lifetime capital gains exemption.
- The maximum gains exemption that an individual can claim on CCPC shares during their lifetime is $848,252 (2018) and is indexed upwards annually. The lifetime farming and fishing property gains exemption is $1,000,000.
- At least 90 per cent of the fair value of the net-assets in the business being sold must be engaged in active business at the time of the sale. (I.e., less than 10 per cent of the fair value of the net assets of a company can be ‘passive’ assets or the shares of the company will not qualify for the gains exemption.)
- At least 50 per cent of the fair value of the net assets in the business being sold must be engaged in active business for the 24 months leading up to the sale. (I.e., less than 50 per cent of the fair value of the net assets of a company could have been ‘passive’ assets or the shares of the company will not qualify for the gains exemption.)
Capital Gains Tax Planning Strategies
There are several tax planning strategies that can be used to ensure your company’s shares qualify for the capital gains exemption and undertaking any of them requires the advice of tax experts. These can be tax accountants, tax lawyers, or both. Remember that every situation is unique so fully analyze the tax and business costs of implementing these strategies before making any decisions.
Following are two examples of tax planning strategies that may be used:
- A “purification strategy” involves moving passive assets out of the CCPC before it is sold in order to meet the above 90/50 per cent tests.
- In order for a family to multiply the number of lifetime capital gains exemptions it has access to on the sale of a CCPC, a corporate restructuring can be undertaken to include multiple family members in the ownership of the CCPC so that multiple family members can claim their gains exemptions on the sale of the business. For example, if a husband, wife, and two children own the shares of a CCPC at sale, it may be possible to earn around $3.39 million in capital gains (2018) on the sale of those shares without incurring any tax.
Get Expert Advice & Follow It
Talk to a tax specialist well in advance of the sale of your business to ensure that the proper structure is in place to maximize your family’s after-tax proceeds on the sale. It is imperative to ensure there is ample time to implement tax minimization strategies and position you and your business for a successful transition.
If you know you’re working with a professional tax accountant, ensure you follow his or her advice. If you’re told to wait at least 24 months before selling the business, it’s with good reason. If you’re not sure why your accountant is making specific recommendations, ask for a break down of the numbers so you can see how much tax you’re saving.