Capital Gains Exemption on the Sale of Qualifying Small Business Corporation’s Shares

The lifetime capital gains exemption is indexed to inflation.  Effective January 1, 2016, the exemption limit is $824,176 for sales of qualifying small business corporation shares.

As a result, every Canadian resident individual who disposes of qualifying small business corporation shares in 2016 can shelter up to $824,176 in capital gains on those shares from tax.

To qualify for the capital gains exemption, an individual must dispose of “qualifying small business corporation shares”.

With respect to small business corporation shares, to qualify for the exemption, the following must be true about the share, the company, and your ownership of the share:

1. For the 24 months prior to the sale:

a. the share(s) can’t be owned by anyone other than you or someone related to you;

b. the company must be a Canadian-controlled private corporation (see blog post here); and

c. at all times, more than 50% of the assets of the company by value were used principally in active business carried on in Canada.

2. At the time of the sale:

a. the company must be a Canadian-corporation private corporation; and

b. at least 90% of the assets of the company by value are used principally in active business carried on in Canada.

The capital gains exemption is a lifetime amount, so the exemption is available to use for your lifetime, but once you have used the entire amount, it is gone.  So, for example, you can sell qualifying shares now and use $100,000 of the exemption, and you will still have $724,176 in exemption room available to be used if you sell qualifying property in the future.  It is also affected by exemptions claimed on the sale of qualifying farm or fishing property.

In some instances, if you claim all or a portion of your capital gains exemption to reduce or eliminate income taxes payable, you may be liable to pay alternative minimum tax (“AMT“).  You will want to check with your tax advisor about the application of AMT if you are thinking of using your exemption.

The foregoing is meant to provide a general summary of the lifetime capital gains exemption.  The analysis of whether a share qualifies can be complex and takes into consideration many factors.  If you have questions, please contact us and we will be happy to assist.

By LaBarge Weinstein’s Taxation, Tax Planning, and Tax Litigation team.

This information is correct as of the date of posted.

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