Do you qualify?
A no-nonsense approach to the Lifetime Capital Gains Exemption

Corporate and securities lawyer, Joseph Chiummiento, of Core Lawyers, describes the Lifetime Capital Gains Exemption (LCGE) for business owners. Do you qualify for the lifetime capital gains exemption?  How can you benefit from the lifetime capital gains exemption?  What do you need to know in order to make use of the LCGE?

Lifetime Capital Gains Exemption

The LCGE is an exemption granted to individual taxpayers in Canada that allows them to sell certain small business shares and not pay tax on approximately $824,177 worth of the proceeds of the gain (see http://www.taxtips.ca/smallbusiness/capitalgainsdeduction.htm).  This means a qualifying person could sell the shares of their business and pocket over $800,000 tax-free, provided they qualify.

Do I qualify for the LCGE?

LCGE is used in tax planning, estate planning and in share sale transactions.  In order to benefit from the LCGE, the business (whose shares will be sold) must meet a three part test to help answer the following questions:

1) Where are your corporate assets held? (the small business corporations test)

The shares must meet the definition of being a “qualified small business corporation shares” as defined by the Income Tax Act (Canada).  Generally speaking, the shares should be that of a Canadian-Controlled private corporation where the fair market value of the assets are used in “active business” in Canada.

2) Did you own the shares for 24 months? (the holding period ownership test)

This test focuses on who held the shares prior to the date they were sold or “deemed” sold and generally means the owner should be the same person (or person or partnership related to that person).

3) What is the value of the business assets? (the holding period test)

This test requires that during the 24 months prior to a sale or deemed sale, 50% of the assets used by the company must have been used in “active business” in Canada.

While the above is an oversimplification of complex tax concepts and definitions, the good news is there are many companies in Canada that qualify for this type of exemption.  Also, for those that do not qualify, there are ways to prepare or ‘purify’ the company to ensure it qualifies, and the exemption is available for future use.

Understanding the “who”, “what”, “where”, “when” and “how” of using the LCGE is a very important “wealth protection” strategy that Accountants and Lawyers have been helping business owners with for many years.  The “Why” is simple, and for the other questions you may seek the advice of a professional.

Speak to someone today or tomorrow about how to use LCGE to your advantage, it is an “opportunity” everyone should consider taking action on to better understand.

If you have any questions about the LCGE or wish to discuss whether this exemption can benefit your business, please feel free to contact me directly.