LIFETIME CAPITAL GAINS EXEMPTION
In the federal government budget announcement recently, the inclusion rate for capital gains has been increased from 50% to 66.6%. This means that two thirds of your capital gains will be included in your income for individuals for that portion of the income above 250 K. For an individual’s income below 250 K the inclusion rate remains at 50%. The increase applies to the capital gain over 250 K. For corporations however the inclusion rate is two thirds on the first dollar. So effectively the federal government is increasing corporate taxes by 33.4% (again a 16.6% increase divided by 50% = 33.4% increase. This is very important for everyone to understand. However, the federal government has left in place for now at least the lifetime capital gains exemption. This exemption allows you to sell shares of a private corporation for up to $1.25 million and pay no capital gains tax whatsoever! There are several conditions which attached to this:
The corporation must be a Canadian controlled private corporation meaning the majority of the shares cannot be held by people residing outside of Canada
50% of the assets of the corporation must have been engaged in generating active business income for the corporation for the previous 24 months prior to the sale. “Active business income” does not include rental property which is defined under the Income Tax Act as passive income. Thus if you have several rental properties owned by a corporation, you may not qualify for the lifetime capital gains exemption. Better to have the corporation sell the rental properties to a different corporation.
90% of the corporation’s assets must have been involved in actively generating income for the corporation as of the time of the sale. Thus if you have investments equal to more than 10% of the corporation’s total assets, you are not going to qualify for the exemption. Again look at transferring these assets out of the corporation so that you will qualify
Note it is the sale of the shares of the corporation which qualify for the exemption where the sellers are the individuals who own the shares. If a corporation sells its assets, the exemption does not apply. Again very important for everyone to understand.
Stemp & Company
