Tax Tip Thursday

This one is for the business owners out there.

I have recently encountered quite a few people considering selling their company and are wondering about the tax impacts. Truth be told, there is little you can do to avoid the tax man in this situation. However, capital gains are probably the best deal going if you ask me AND, if your business qualifies, the Lifetime Capital Gains Exemption makes it really beneficial to business owners.

Capital gains occur from the sale of assets, whether they were investments, houses, property, or businesses. There are different rules depending on what it is that you are selling, and today we are going to focus on selling your business. Normally only half the amount of the gain is included in your taxable income, where it would be taxed at your normal marginal rate. In theory, this encourages Canadians to use their surplus funds to invest in more businesses.

About the Lifetime Capital Gains Exemption

The Lifetime Capital Gains Exemption (LGCE) is helpful for small business owners and their family members, allowing them to avoid paying taxes on capital gains income up to a certain amount when they sell shares in the business, a farm property, or a fishing property. It is not intended for any other kind of capital gain.

LGCE has an exemption limit for small business of $913,630 in 2022, and it goes up each year! Something that is actually in our favour! For farms and fisheries, the limit is $1 million. Normally, half of that return would be taxed. With LGCE, you’re allowed to subtract that amount from your profits.

So, let’s say you sell shares in your small business corporation for $1 million. Normally you would owe taxes on $500,000 of that. LGCE allows you to deduct just over $900,000 from the taxable profits, meaning you would only get taxed on 50% of the remainder ($43,185 in taxable income rather than $500,000!).

Sounds great, right? It can be, but it has very strict rules.

Lifetime Capital Gains Exemption Eligibility

There are some rules that you have to follow if you’re going to be able to get this enormous exemption:

• Your small business must be incorporated;
• The majority of your business must have been active in Canada for two years before the sale;
• The shares must be owned by you or someone related to you in the last two years before the sale;
• 50% of the corporation assets must be actively used in operations in Canada over a 24 month period; and
• 90% of the assets need to be used in business operations at the time of the sale.

I have encountered situations where people thought they were going to take advantage of the exemption only to find out they were off on the asset requirements. So be careful and definitely come see us LONG BEFORE you are planning on selling your business! We will make sure it is structured properly so that you can take advantage of the tax-free million dollars!

Save Hundreds of Thousands

It is very important to come see us about this one well in advance of when you want to sell your business. We need to make sure you’re using your assets properly and that everything is structured correctly. If it isn’t you might need to wait a couple of years to be able to claim the LGCE! Give us a call or book an appointment today to get started.

Disclaimer:

This article provides information of a general nature only. It is only current at the posting date. It is not updated and it may no longer be current. It does not provide legal or tax advice nor can it or should it be relied upon. All tax situations are specific to each individual. If you have specific tax questions you should book an appointment for a 1 on 1 consultation.