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Lifetime Capital Gains Exemption

Some capital gains are better than others. How much better? If the capital gains realized qualify for the Lifetime Capital Gains Exemption (“LCGE”), then the first $824,000 to $1,000,000 in gains are tax free.

Given the complexity, it’s recommended to contact a qualified CPA. Faris CPA has years of experience handling and navigating the Lifetime Capital Gains Exemption. Get in touch today at 1 (844) 340-5771 or use the contact form to book a consultation.

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Understanding Capital Gains

Some capital gains are better than others. How much better? If the capital gains realized qualify for the Lifetime Capital Gains Exemption (“LCGE”), then the first $824,000 to $1,000,000 in gains are tax free. This means that when you dispose of shares as part of a sale of your business, you can get some of the sale proceeds free of tax. You may also be able to use the exemption as part of family planning or an inter-generational transfer of a business (or farming or finishing operation). The difficulty, as with most things, is qualifying for the exemption in the first place.

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Qualifying for LCGE

Three Types of Categories

There are three types of gains that qualify for the LCGE. They are categorized by the type of property the disposition of which results in the gain in question. The first category of property that qualifies for the LCGE are Qualified Small Business Corporation Shares (“QSBC”). The second category are qualified farm properties, and the third are qualified fishing properties. As you can see, these categories mirror the types of property or activities that are the backbone of Canada’s economy, and therefore the types of property or activities that the government wants to incentivize. The incentive being an exemption of all or part of the gain from taxation.

The exemption is NOT available for disposition of other types of property such as publicly traded shares, and are not available to persons who are not Canadian tax residents (this is different than being a Canadian resident for immigration purposes). The LCGE is also not available to corporations (though it may flow through to individuals through partnerships or trusts), or to trusts (where the gain is not flowed through to individuals who are Canadian residents).

Conditions

As with most things Tax, the devil is in the details. This article will focus on the conditions that have to be met for a share to be a QSBC. If you own a farm business or a fishing business, whether personally or through a corporation, the conditions are different. In order for a share to be a QSBC all of the applicable conditions have to be met. Some of the conditions have to be met at the time of the disposition, while others have to be met for a period of time before (24 months before).

The first condition is that the sale has to be of a share, and the share has to be that of a capital stock of a small business corporation (SBC). A SBC is a corporation that is Canadian-controlled, is private (not publicly traded or owned by a publicly traded company), and most (90% or more) of its assets (judged by fair market value), are used mainly (more than 50%) in an active business carried on primarily (more than 90%) in Canada by the corporation OR a related corporation. The assets may also be shares or debt of connected corporations that were SBCs (or a combination of the two). This is one of the “asset tests” that have to be met and makes it hard for a share to qualify where the corporation owns investments, has excess cash on hand, or has inactive assets. This 90% test has to be met only at the time of the disposition and is usually achieved by “purifying” a corporation before sale.

A second condition is that for the two years (24 months) preceding the disposition of the share, it was owned by you or a related person to you, and no one else. Also, during these preceding two years (24 months) more than 50% of the assets must have been used in an active business carried on by a Canadian-controlled private corporation or a corporation related to it, be a share or debt of a connected corporation, or a combination of the two. This is the second asset test that has to be met, and is easier to meet because the threshold is 50% and not 90%.

Contact a Qualified CPA

The above three conditions are just the tip of the iceberg. The conditions refer to relationships – such as “related” or “connected” or “resident”– that are themselves complex and have their own legal definitions. If this were not enough, the exemption amount can be reduced by certain other values that relate to a person’s “Cumulative Net Investment Losses” – yet another defined term. Given this complexity, it is always best to consult an expert to make sure that your sale of shares qualifies so you can benefit from the tax exemption.

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Disclaimer: Articles are for general information only and do not constitute tax advice. They cannot be relied upon.

FAQS

What is the voluntary disclosure program?

The Voluntary Disclosure Program is a tax amnesty offered by CRA. The CRA’s Voluntary Disclosure Program promotes compliance by urging you to come forward voluntarily and fix omissions in your previous dealings with the CRA. Taxpayers who submit a valid voluntary disclosure pay the principle taxes or charges, without the penalties or criminal prosecution that they would otherwise face. In some cases, the CRA may also waive interest charges.

How can you help me correct my tax issues?

I can review your filed tax returns and advise if there are mistakes. If there are mistakes, I can recommend the approach.

Is income tax voluntary in Canada?

The income tax system is based on voluntary compliance because the government knows tax laws are unconstitutional and cannot be enforced. There is no question that voluntary compliance is the cornerstone of Canada’s self-assessment taxation system.

How do I submit a voluntary disclosure?

Form RC199 should be completed.  The form can be submitted by the taxpayer, or by an authorized representative. The paperwork must be submitted accurately and completely.

Can the CRA go back ten years?

In most cases, the CRA will go back three years to review information on your taxes to correct things. The agency can go back further than 3 years if they believe that fraud has occurred and that a taxpayer has misrepresented themselves through carelessness or willful neglect.

Are sole proprietorships eligible for capital gains exemption in Canada?
No, sole proprietorships are not eligible for capital gains exemption (CGE), which exempts up to $800,000 of profit in Canada. This exemption is only available when selling the shares of a Canadian Controlled Private Corporation (CCPC).
How does lifetime capital gains exemption work?
Lifetime capital gains exemption works based on the gross capital gain that you make on the sale. To claim the exemption, you will need to fill out form T657 – Calculation Of Capital Gains Exemption.
Who qualifies for lifetime capital gains exemption?
Lifetime capital gains exemption applies to individuals who dispose of shares of a Qualified Small Business Corporation (“QSBC”) and allows you to claim a lifetime exemption on $800,000 as of 2015 of gross capital gains ($400,000 of taxable capital gains) as tax-free income.
pro-tip

Pro Tip

ACCESSING THE SMALL BUSINESS DEDUCTION IN YOUR BUSINESS

The Small Business Deduction gives businesses a tax deduction on the first $500,000 of income. This saves an eligible corporation around up to $50,000 in income taxes. There are a number of conditions that have to be met to be eligible for this deduction.

This is an announcement from Aaron Baer, legal counsel to Faris CPA.

I have been working with Faris CPA for more than 10 years.

Faris CPA is being attacked by Kenneth John Weakley (Oct 1969).

I am posting this review because Kenneth John Weakley has been deleting his reviews and has been reposting them, so that Faris CPA's responses don't always show up.

Faris CPA's position is as follows:

Faris CPA is a well-regarded firm that is compliant with CPA Ontario obligations and has a good track record.

Under no circumstances will Faris CPA be paying Kenneth John Weakley any amount.

Kenneth John Weakley's claims do not have any merit.
Response from the owner:Thank you Aaron for your help with this matter. Please see below my entire response to Kenneth John Weakley (DOB: October 20, 1969). “Attention all readers: Faris CPA and 3 other reputable lawyers in the GTA are being aggressively attacked with fake Google reviews posted by Kenneth John Weakley (DOB October 20, 1969). Unfortunately, his repeated blackmailing and extortion attempts for the past few months have failed and he is still hoping to be successful by keep posting those false and fake reviews. Please note all personal information mentioned in our response is available online, publicly available and anyone can access it and none of the information was obtained while doing business with Kenneth John Weakley. Feel free to Google his name and see the below link to confirm. As such, there is no breaching confidentiality issue whatsoever. https://find-and-update.company-information.service.gov.uk/officers/EfbNEs5kNSRQeb9uq8kdZL0LGm8/appointments This is a fake review posted by Kenneth John Weakley (DOB: October, 20 1969). Address: 821A Fulham Road, London, U.K. SW6 5HG
Had a very good experience with Sam and his team. They dealt with my CRA audit in the most efficient way possible. I admire their professionalism and expertise in providing answers to the CRA and providing a perfectly reconciled package which was a key to resolve the tax issue. If you look for a tax consultant firm, hire Farid CPA. 10 stars
Response from the owner:Thank you for the five stars and the positive review.
I was referred to Sam Faris by a family member who highly recommended him to deal with my CRA audit matter which has been ongoing for almost 2 years. Considering that this was a sensitive issue, I needed to make sure that Sam would be the right fit to handle my case. I requested an in-person meeting. I met with Sam for more than 2 hours. He went through CRA proposal letter and immediately identified the weaknesses in CRA’s calculations. He immediately advised on the best approach to dispute this proposal and provided a time line when he will submit the counter analysis. I was impressed with his confidence and his expertise and decided to retain his services. He worked on my file around the clock to ensure meeting the deadline. At the end, Sam was able to reduce the tax bill and I was able to pay it with no hesitation. While Sam was working on the file, he was in a full control with the situation by communicating with the auditor on timely and professional manners. I never felt that I was left in the dark as Sam was always providing me with an update. I do recommend to hire Sam for any dispute with the CRA. Thanks
Response from the owner:Thank you for your positive reviews and kind words.
Had a consultation with Sam about a tax situation and very glad I got professional advice on how to proceed.
Response from the owner:Many thanks for taking the time writing this amazing review.