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Before making a major financial decision you
should consult a qualified professional.
An individual who owns shares in a qualifying small
business corporation may be able to claim a $1 million+ lifetime capital
gains exemption (LCGE) when those shares are sold. The actual capital
gains deduction is 50% of the capital gains exemption.
There are
2 main rules, one regarding ownership of the shares, and the
second regarding the use of the assets of the corporation.
1. Throughout the 24 months
immediately preceding disposition of the shares, the
shares must not have been owned by anyone other than the
individual or a person or partnership related to the
individual. The shares may be newly-issued shares
that have not been owned for a full 24 months, but they
must not have been owned by an unrelated person or partnership in that
time. Unfortunately, s. 110.6(14)(f) deems newly-issued shares to be owned immediately
before their issue by an unrelated person or partnership unless the shares
were issued:
as consideration for other shares,
as part of a transaction or series of transactions in
which the person or partnership disposed of property to the corporation
that consisted of
all or substantially all the assets used in an active business carried on by that person or the members of that partnership, or
an interest in a partnership all or substantially all the assets of which were used in an active business carried on by the members of the partnership, or
as payment of a stock dividend
2. Throughout the 24 months
immediately preceding disposition of the shares, more than
50% of the fair market value of the assets of the
corporation must have been used principally in an active
business carried on primarily in Canada by the corporation
or a corporation related to it. At the time of
disposition of the shares, all or substantially
all (90% as per CRA) of the fair market value of the
assets must have been used in the active business. Examples of assets that may not qualify as being used in
an active business are stocks, bonds, rental property, and life insurance
policies.
If the individual dies and has a deemed disposal of the
shares, at the time of death the shares may not be
qualified small business corporation shares because of the
90% rule. In this case, the Income Tax Act provides
that the shares may still qualify, if the corporation was
a qualified small business corporation at any time in the
12-month period before the death of the individual.
Small Business Corporation Shares Sold to
Non-Resident or Public Corporation
The 2009 Budget measure included in Bill
C-10 amended s. 256(9) so that it
does not apply "for the purposes of determining if a
corporation is, at any time, a small business corporation or a
Canadian-controlled private corporation". Thus, the s. 256(9)
issue outlined below seems to be resolved.
Prior to a Federal 2009 Budget measure, when SBC shares SBC
were sold to a non-resident or to a
public corporation, there could have been a resulting denial of the capital
gains exemption. This is because s. 256(9) of the Income Tax Act deemed that where control of a corporation is acquired, it is deemed to be
acquired at the commencement of the business day. The result was that
when the shares are sold, they are deemed to be under the control of the
purchaser, which is not a qualifying SBC. A taxpayer could have elected to
have s. 256(9) not apply, but this could cause other complications. A
Federal Court of Appeal case dealing with s. 256(9) is La
Survivance v. Canada 2006 FCA 129. CRA issued Technical
Interpretation 2006-0214781E5, which deals with s. 256(9) and the capital
gains deduction.
It is imperative to get
advice from a tax professional (Chartered Professional Accountant or Tax
Lawyer) experienced in this area well in advance of making a sale of qualified SBC shares.
Be
careful to minimize the assets in your corporation that are NOT used
to produce active business income, such as cash, investments,
shareholders loans, rental property, etc.
This is
complicated and can save more than $200,000 in taxes - do it
right and get professional advice - well in advance!
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