Looking for ways to decrease your taxable income? If you have sold a business, or shares in a business, and are thinking about selling a business, the Capital Gains Exemption may be right for you.
Under the Income Tax Act, an individual can claim a lifetime capital gains exemption (LCGE) to reduce the amount of taxable income made from such an arm’s length sale. The current amount for 2014 is $800,000 and will rise to $813,600 in 2015 to account for inflation – which is a cumulative amount over your lifetime. Individuals must include the capital gain made from the sale as total income (keeping in mind that half of capital gains are taxable), and then claim the deduction.
There are limits to the type of sales which are eligible for the exemption, and are described as such:
- Sale of shares of a qualified small business corporation (QSBC)
- Sale of a qualifying farm
- Sale of a qualifying fishing property
In order for the shares to qualify for the exemption the business must have been a small business corporation at the time of disposal. This means the company is defined as a Canadian controlled private corporation (CCPC) and that 90% of its assets on a fair market value basis are used in the active business primarily located in Canada. In addition to being a small business corporation, during the 24 months prior to the disposal, 50% of its fair market assets needed to be used principally in a business carried out in Canada. It is recommended to move assets which do not qualify (such as stocks, bonds and rental property) outside of the business to meet the 24 month and disposal requirements.
For the 24 months before the disposition, the shares must not have been owned by any one else, other than a person or partnership related to the individual. Transferring the shares from a spouse, your children or even from a “family trust” will qualify under the 24 month period.
For example, if an individual sold their personally owned company for $1M and realized a gain of $500,000, they would need to declare $250,000 in capital gains under their total income and assuming a 46% tax rate, pay $115,000 in additional taxes. The exemption would allow the individual to apply $500,000 of their lifetime capital gains exemption and avoid $115,000 in taxes. Furthermore, the individual has a remaining $300,000 of the exemption moving forward.
There are other restrictions and tax implications. The prior year allowable business investment losses (ABIL) and cumulative net investment losses (CNIL) are used as reductions to the Capital Gain Exemption calculation. There is also an alternative minimum tax (AMT) calculation that might trigger taxes payable.
For tax planning purposes, you will want to consider the timing of your sale to meet the requirements outlined. Get in touch with Complete Accounting, or book a free consultation online to meet with us.