Individuals selling their business often think of using the capital gains exemption to help keep the tax man at bay. Undoubtedly, this tax exemption is a useful tool when an individual is thinking of selling shares in their business, however, there are several conditions that must be satisfied before this exemption applies. The following is a brief overview of those conditions.
For the exemption to apply, the shares to be sold must be “qualified small business corporation shares” (as defined in the Income Tax Act (Canada)). To meet this definition, the corporation in question must be a “small business corporation”, meaning that it must be a Canadian-controlled private corporation (generally, a private corporation that is resident in, and incorporated in, Canada and not controlled by certain groups of persons, for example, non-residents of Canada) and all or substantially of its assets must be used in an active business carried on primarily in Canada (generally, this means at least 90% of the fair market value (FMV) of the corporation’s assets). This may also be met if the corporation holds shares or indebtedness of certain “connected” corporations (a discussion of connected corporations is beyond the scope of this article).
The second test that must be satisfied is that more than 50% of the FMV of the assets of the corporation must have been used in an active business carried on primarily in Canada by the corporation or a related corporation throughout the preceding 24 month period (again shares and indebtedness of certain “connected” corporations may assist in satisfying this test) and the shares must have not been owned by anyone other than the individual (except for related persons) in the preceding 24 months.
For 2016, the amount of capital gain that can be offset with the capital gains exemption is $824,176, making it a very valuable exemption. There are several tax planning opportunities in respect of the capital gains exemption, and thus, individuals that may be able to take advantage of this exemption should reach out to a tax planning professional.
Stay informed on M&A developments and subscribe to our blog today.