The Importance of the Capital Gains Exemption for Owner-Managers *

Since 1985, the capital gains exemption has been available to Canadian business owners.
The concept is simple—if you sell shares of a qualifying corporation for a profit, the first $750,000 of your gain on a lifetime basis can be received on a tax-free basis. The rules are complicated and it is quite possible that your shares may not qualify by not meeting one of the detailed conditions that apply. While shares of some corporations may never qualify for the exemption (for example, shares of many investment companies won’t qualify), other share investments that are currently offside can be put back on track with advance planning. Since the conditions are detailed, very simple steps can often make the difference between qualifying and not qualifying for the exemption when you dispose of your shares.


How do I qualify for the Capital Gains Exemption?

If you sell shares of a small business corporation (SBC), and meet the conditions for the exemption, then the gain from the sale of your business will qualify for the capital gains exemption. To qualify for the exemption, the first condition is that your corporation must be an SBC at the time of sale. That means that it must be a Canadian-Controlled Private Corporation (or CCPC) and all or substantially all of its assets must be used in an active business carried on primarily in Canada. The Canada Revenue Agency interprets “all or substantially all” to mean that assets representing at least 90 per cent of their fair market value of all corporate assets must be used for business purposes. If you hold shares of an SBC, there is a second set of conditions which you must meet to qualify for the exemption:

1) More than 50 per cent of the corporation’s assets (again on the basis of fair market value) must have been used in an active business carried on primarily in Canada throughout the 24-month period immediately before the sale; and

2) The shares must not have been owned by anyone other than you or someone related to you
during the 24-month period immediately before the sale.


* this article was written by Bruce Ball, CA, CFP, TEP - Bruce is a Partner in the National Tax practice of BDO Dunwoody LLP, where he develops tax planning strategies for clients. He is also a co author of the Guide to the Family Business, Canadian Edition.