A major consideration when planning for one’s exit is the lifetime capital gains exemption (the “LCGE”). Here’s how it works: When one disposes shares of a “Qualified Small Business Corporation” (a “QSBC”), if certain tests are met, each taxpayer has a LCGE which essentially wipes out capital gains taxation on the disposition of their shares – up to the LCGE limit, which is currently $883,384, and which is indexed and increases on an annual basis.
The LCGE is available to individuals upon the disposition of either:
- Qualified farm property.
- Qualified fishing property (post 2016).
- Qualified small business corporation shares (QSBC).
- The shares must be shares of a Canadian-Controlled Private Corporation (CCPC).
- At the time of sale, the share of the capital stock must be part of a small business corporation, and was owned by you, your spouse, or common-law partner, or a partnership of which you were a member. Additionally, during the 24 months immediately before the sale of the shares, more than 50% of the fair market value of the assets must have been used in an active business carried on primarily in Canada.
- Hardest condition to meet is that to qualify as a Qualified Small Business Corporation, on the date of sale more than 90% of its assets must be used in an active business in Canada.
- The amount of capital gain that is eligible for the capital gains deduction may be affected by the balance in your cumulative net investment loss (CNIL) account and if you have ever claimed an allowable business investment loss (ABIL)
Sometimes a business does not qualify as a QSBC at a given point in time, but often this can be remedied through a process called “purification”. For a company to qualify as a QSBC at the time of a future sale, it may be necessary to take steps now to remove from the company non-active business assets, such as excess cash or portfolio investments. This can be as easy as having the company use its excess cash to pay off debts or pay dividends to its shareholders, or it may involve a corporate reorganization to transfer the non-active assets into a separate company.
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