How can you get $750,000 TAX FREE??

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 youduring 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.

5 Benefits of using a family trust

5 Benefits of using a family trust

The following are some benefits of using a family trust structure.

1. Income splitting. Trusts can be an effective way to achieve income splitting, particularly with children (subject to the potential application of the attribution rules and the “kiddie tax”).

2. Capital gains exemption. Beneficiaries may be eligible to claim the $750,000 enhanced capital gains exemption on the capital gain allocated to them from the disposition of certain types of shares. Both the beneficiary and the corporation must meet all relevant tests at the time of disposition, and the trustee must allocate the capital gains to the beneficiaries. As a result, the $750,000 capital gains exemption may be multiplied by the number of family members who are beneficiaries of the trust, without direct share ownership.

3. Creditor protection. Trusts offer some degree of creditor protection when the beneficial ownership of assets shifts to other beneficiaries.

4. Capital gains splitting. Trusts can be used to transfer appreciation in capital property, such as shares, to other family members, especially children. Generally stated, there is no attribution of taxable capital gains earned by minors. In this circumstance, the minor beneficiaries would be subject to tax on the capital gains at their marginal rates.

5. Reducing tax liability at death. Transferring assets to a trust may limit the size of the individual’s estate, such that tax liability at death is reduced. In addition, probate fees may be reduced.