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Capital Gains Deduction Series, Part I: The Basics

Posted: October 10, 2017 By: Walter Harder
Posted in: Strategic Thinking, Financial Literacy, CRA, knowledge bureau, Canada Revenue Agency, income tax act, Evelyn Jacks, income tax, tax deductions, tax education, financial education, small business tax, tax benefits, taxpayer, farming tax, fishing tax, agriculture tax, Capital Gains Deduction, corporation shares, disposition dates, spousal taxation, agricultural property, fishing property, business partnership, business taxation

With proposed changes looming to the eligibility for the Lifetime Capital Gains Exemption (LCGE), which becomes the Capital Gains Deduction on the personal tax return, tax and financial advisors are well advised to review the rules and have discussions with their clients on whether any year end planning opportunities should be pursued.

 

Under current legislation, all Canadian residents are eligible for a Lifetime Capital Gains Exemption on the disposition of qualified small business corporation shares, qualified farm property or qualified fishing property.

This deduction allows the taxpayer to earn up to $835,716 (2017, indexed annually) in gains of the sale of qualified small business corporation shares or a $1,000,000 gain on the sale of qualified farm or fishing property and pay no income tax on the gain.

The gain on the sale of a small business corporation would qualify if the shares meet these criteria:

  • They are shares of a small business corporation that were not owned by anyone other than the taxpayer, the taxpayer’s spouse or common-law partner, or a partnership related to the taxpayer, during the 24-month period preceding the date of disposition.
  • At the time of the disposition, all or substantially all (90 per cent or more) of the assets (on a fair market value basis) are used principally (more than 50 per cent) in an active business carried on primarily (also more than 50 per cent) in Canada.
  • During the 24-month period prior to the disposition, the corporation’s assets (on a fair market value basis) were used primarily (more than 50 per cent) in an active business carried on primarily in Canada.
  • During the 24-month period prior to disposition, the shares were shares in a Canadian controlled private corporation.

If the business has existed for less than 24 months, the criteria listed above must apply for the period from the inception of the business to the sale of the shares.  (Note, should the new proposals on private corporations and family members who hold shares, as well as trusts, be enacted, this 24-month period will be reduced to 12 months for the purpose of crystallizing the LCGE.)

The gain on a farm or fishing property would qualify if the property is:

  • An interest in a family farm/fishing partnership owned by the taxpayer or the taxpayer’s spouse or common-law partner
  • Shares in a family farm/fishing corporation owned by the taxpayer or the taxpayer’s spouse or common-law partner
  • Real property (e.g., land, buildings, eligible capital property such as quotas) that was used
    • in the business of farming by the taxpayer, spouse (or common-law partner), child, or parent in the preceding 24 months prior to disposition. Gross farming income must also exceed income from all other sources for at least two years, or
    • by a family farm corporation or a family farm partnership of the taxpayer, the taxpayer’s spouse, common-law partner, child or parent that has farming as a principal business for at least 24 months prior to the disposition.

Because of a change in wording in the Income Tax Act, if the farm was owned prior to June 18, 1987, then the property will still qualify for the CGE as long as it was used for farming for any five-year period while owned by the farmer.

Next week: Multiplying the Deduction

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