Selling your business? A lifetime exemption may shelter the gain.
Canada lets owners of qualifying small-business shares claim a lifetime capital gains exemption. Here is the idea and why planning ahead matters.
How it works, in three steps
- 1A gain on qualifying shares can be tax-free. Individuals can shelter a lifetime amount of such gains, currently over $1 million and indexed over time.
- 2The shares have to qualify. Among the tests, the company must be a Canadian-controlled private corporation and you (or someone related) must have held the shares for 24 months. More than half of the company's value must be in an active business, and the test at the moment of sale is stricter.
- 3Planning ahead matters. Because of the tests, owners often review the company's cash and investments well before a sale, so the shares are more likely to qualify.
The exact amount and tests are set out in the Income Tax Act and can change, so confirm the current figures with your accountant.
Why it matters
If your unused lifetime limit is larger than the taxable gain on qualifying shares, there may be no tax on that gain. Other taxes, such as the alternative minimum tax, can still apply.
Could this apply?
It may apply if you
- Own shares of a small private Canadian company
- Are planning to sell the shares, not just the company's assets
- Have not used up your exemption on an earlier sale
It may not if
- The company holds a lot of investments or idle cash
- You sell the assets instead of the shares
- The shares have not been held for the full 24 months
The honest catches
- It is easy to lose. A company that drifts toward holding investments can fail the tests when it matters.
- Structure matters. Holding companies and family trusts change the analysis, and TaxOptima does not model them.
- Get advice early. This is a case where an accountant can often help years before a sale.
This is education, not tax, legal or investment advice. Talk to a licensed Canadian chartered professional accountant or certified financial planner before you act.
See the tax on a gain that does not qualify
If your shares do not qualify, the gain is taxed like any other capital gain. Estimate it with the calculator.
Open the Capital Gains Tax Calculator