The Lifetime Capital Gains Exemption
Jarrett McKay - May 08, 2017
The lifetime capital gains exemption (LCGE) is a benefit that assists many Canadian entrepreneurs when it comes time to sell their businesses to fund retirement. It allows Canadians a lifetime tax exemption from a gain on the sale of a qualified smal
The lifetime capital gains exemption (LCGE) is a benefit that assists many Canadian entrepreneurs when it comes time to sell their businesses to fund retirement. It allows Canadians a lifetime tax exemption from a gain on the sale of a qualified small business corporation. In 2015, the LCGE amount is $813,600. However, there are certain detailed conditions which apply to qualify for the exemption. These should be considered now if planning for retirement in the near future.
The company must be a qualified small business corporation (QSBC) at the time of sale. It must be a Canadian-controlled private corporation (CCPC) with all or substantially all of its assets (defined as at least 90 percent of the fair market value of total corporate assets) being used in an active business primarily operated in Canada. Therefore, unincorporated businesses, such as sole proprietorships and partnerships, are not eligible. However, there may be ways to incorporate a business to take advantage of this benefit.
As a shareholder of the QSBC, the shares the individual holds must not have been owned by anyone other than the individual or person or partnership related to the individual during the two years prior to the sale. During that period, more than 50 percent of the corporation's fair market value of assets must have been used to actively carry out business in Canada.
Given these constraints, it may be difficult for a company to meet these conditions continuously in the future, which may put an exemption opportunity at risk when an entrepreneur nears retirement. As such, the option to crystallize, or lock in, the exemption at a time when the corporation qualifies may be a consideration. Crystallization guarantees the exemption and protects against possible future changes to the benefit.
As always, seek the help of a tax professional to review your personal situation and prepare a plan that meets your requirements.
Note: For qualified farm or fishing properties (QFFP) disposed of after April 20, 2015, Budget 2015 introduces an additional deduction. This will effectively increase the lifetime capital gains exemption (LCGE) to $1 million for QFFP. This may be subject to change depending on potential changes in the government as a result of the election in October 2015.
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