Life time capital gain exemption for individual selling small business shares:

When you make a profit from selling small business you must consider tax savings from cumulative lifetime capital gains exemption (LCGE). An individual who is a tax resident of Canada is entitled to a cumulative lifetime capital gains exemption (LCGE) on net gains realized on the disposition of qualified small business corporation shares (QSBCS). For 2019 LCGE is $866,912.

If you are offside with the conditions to be QSBCS you can purify the corp first by removing excess non business assets. If you are unsure if your corp will qualify in the future you can “crystallize” it at a time when it does qualify.

For unincorporated business owners it is possible to roll your business assets into a corporation without triggering tax and when sell the shares of these new corp. if set up is done correctly you won’t have to wait for 24 months to qualify for QSBCS.

What are Qualified small business corporation shares (QSBCS):

A share of a corporation will be considered to be a qualified small business corporation share if all the following conditions are met:

  • at the time of sale, it was a share of the capital stock of a small business corporation (see below), and it was owned by you, your spouse or common-law partner, or a partnership of which you were a member;

  • throughout that part of the 24 months immediately before the share was disposed of, while the share was owned by you, a partnership of which you were a member, or a person related to you, it was a share of a Canadian-controlled private corporation (see above) and more than 50% of the fair market value of the assets of the corporation were:

    • used mainly in an active business carried on primarily in Canada by the Canadian-controlled private corporation, or by a related corporation

    • certain shares or debts of connected corporations

    • a combination of these 2 types of assets

  • throughout the 24 months immediately before the share was disposed of, no one owned the share other than you, a partnership of which you were a member, or a person related to you.

    Small business corporation

    A Canadian-controlled private corporation in which all or most (90% or more) of the fair market value of its assets:

    • are used mainly in an active business carried on primarily in Canada by the corporation or by a related corporation;

    • are shares or debts of connected corporations that were small business corporations; or

    • are a combination of these 2 types of assets

Plan ahead of time to make sure your corp structure qualify. Whether you sell to someone to pass on to your children this life time capital gain exemption is an important tax saving tool!

Jane Zhao