Lifetime Capital Gains Exemption

Understanding the Exemption

• The lifetime capital gains exemption allows for the tax-free sale of shares of a qualifying business.
• The exemption amount for 2022 is $1,016,836.
• Alternative Minimum Taxes and other factors should be considered when calculating the tax implications of a sale.
• Passive businesses, such as those earning interest, rents, royalties, or capital gains from investments, do not qualify for the exemption.
• Active businesses, such as accounting firms, marketing businesses, trucking companies, restaurants, corner stores, and graphics design businesses, may qualify for the exemption.
• Business property of a related business, such as a trucking company's real estate holding company, may also qualify for the exemption.

Small Business Corporation Test

• Must be shares of Capital Stock.
• Must be owned by the individual or spouse/common-law partner or partnership related to the individual.
• Must be a Canadian-controlled private corporation.
• More than 90% of the fair market value of assets are attributable to an active business carried on in more than 50% in Canada.

Holding Period Test

• For the previous 24 months before disposition, shares must not have been owned by anyone other than the individual, person or partnership related to the individual. There are certain exceptions to the rule.

Fair Market Value Asset Test

• Throughout the 24 months before disposition, the shares must have been of a Canadian-controlled private corporation of which more than 50% of the fair market value of the assets were used in an active business.
• Planning can be done to meet these qualifications.

Calculating the Exemption

• Three amounts should be considered when calculating the exemption: unused lifetime capital gain exemption, cumulative gains limit, and annual gains limit.
• Planning strategies, such as declaring dividends, reducing liabilities, paying out Capital dividends, purchasing more active assets, or transferring passive assets to another corporation, can maximize the exemption.

Multiplying the Exemption with Family Members

• Properly structuring affairs and planning can multiply the exemption with family members.
• Each family member could potentially receive the exemption amount of $1,016,836.
• This means that a business started for a dollar and sold for millions could potentially have the entire gain wiped out.

Summary

• The lifetime capital gains exemption can provide significant tax savings for the disposition of a business.
• It is important to understand the eligibility requirements and properly plan to maximize the exemption.
• The exemption also applies to fishing or farm property, which is not discussed in this video.