One characteristic consequence of a share sale is, generally,
that the vendor realizes a capital gain. Canadian resident
shareholders are generally taxed on half of the amount of the
capital gain. If available, the cumulative lifetime capital gains
exemption can shelter all or a portion of the capital gain,
reducing the overall tax bill of a shareholder.
The cumulative lifetime capital gains exemption entitles every
individual who is a resident of Canada throughout the year to a
deduction from capital gains realized on the disposition of
"qualified small business corporation shares"
(QSBC Shares). The deduction allowed is indexed
annually. For 2015, the deduction limit is $813,600.
Generally, shares of a corporation will be QSBC Shares of an
individual if the following three tests are met:
The corporation is a "small
business corporation" as defined in the Income Tax Act
No one other than the individual or a
person or partnership related to the individual owned the shares
throughout the 24 monthly immediately preceding the sale; and
The corporation satisfied criteria
requiring the use of at least 50% of its assets in a Canadian
active business throughout the 24 months preceding the sale.
Although the name may suggest that a "small business
corporation" must be small, this is not in fact the case. A
corporation will be a small business corporation where, generally,
the corporation is a "Canadian-controlled private
corporation" and certain assets tests relating to the use of
the assets in a Canadian business are met in a 12 month period.
Where all of the above requirements are met, the shares of the
target corporation will be QSBC Shares and any gain realized on the
disposition of these shares will be available for the cumulative
lifetime capital gains exemption. If the individual has previously
used a portion of his or her cumulative lifetime capital gains
exemption, the deduction will be reduced by that amount. If an
individual has previously used the full $813,600 of his or her
cumulative lifetime capital gains exemption, the deduction will no
longer be available to that individual.
It is clearly very advantageous to the individual shareholders
of a target corporation if the shares disposed of are QSBC Shares.
Accordingly, an individual vendor should always consider whether
the shares of a the corporation qualify as QSBC Shares. A company
that is not currently in compliance with one or more of the above
tests may be able to "purify" itself if the proper
measures are taken prior to sale. However, certain of the
purification techniques can take up to two years depending upon
which test the corporation is offside. As a result, use of the
cumulative lifetime capital gains exemption to shelter capital
gains arising on the disposition of a target corporation's
shares may not always be available.
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general guide to the subject matter. Specialist advice should be
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