Business Brokers BC Blog

Some information on the Capital Gains Exemption.

Tuesday, February 9th, 2010

In Canada in 2007 the maximum Capital Gains Exemption (CGA) was increased from $500,000 to $750,000.  The rules related to CGA are complex and one should certainly consult tax professionals when considering taking advantage of it.  However, it is definitely one of the best (and last) tax favorable mechanisms for an individual to make use of, especially when it comes to selling their business.

Consider the following general information:

  1. An individual who owns shares in a qualifying business corporation may be able to claim a $750,000 CGA when those shares are sold.  (It is not applicable to a business that is structured as a sole-proprietor).
  2. There are two main rules:
    1. One regarding ownership of the shares, and
    2. One regarding the use of the assets of the corporation.
  3. In the 24 months immediately preceding the sale and disposition of the shares, the shares must not have been owned by anyone other than the individual (or a related partnership).
  4. The shares may be newly-issued and have not been owned for a full 24 months, but they must not have been owned by anyone else in that time.
  5. In the 24 months before the 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.
  6. At the time of disposition of the shares all or substantially all (90%) of the fair market value of the assets must have been used in the active business.  (Examples of non-qualifying assets would be stocks, bonds and rental property).

The other things to keep in mind are:  if the shares are sold to a non-resident of Canada or to a public corporation there could be a resulting denial of the capital gains exemption.  This is because the shares are now under the control of a purchaser which is not a qualifying small business

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