The lifetime capital gains exemption on the sale of a business is one of the most favourable tax breaks in Canada. If you own a small business and you’re thinking about selling it, it’s a smart idea to know how to organize and structure the sale to give you the full benefit of the exemption.
What Is the Lifetime Capital Gains Exemption?
As a general rule, the sale of the shares of a corporation that operates a small business is a capital gain. Anyone realizing a capital gain must include 50% of it in their income and pay taxes accordingly. However, an exception allows the capital gains on qualifying shares to be completely exempt from tax up to $848,252, as of 2018. This amount updates annually.
What Shares Qualify for the Capital Gains Exemption?
To qualify for the exemption, you must own an incorporated business. If you are not incorporated but still want to use the exemption, you may be able to roll the assets over into a corporation. If this is your situation, it’s a good idea to consult a professional on how to do this.
Only the sale of shares qualifies for the exemption. The sale of business assets does not. The shares you sell must also meet the Income Tax Act’s definition of Qualified Small Business Corporation Shares (QSBCS). To be considered as QSBCS, you, your spouse, a common-law partner, or a partnership of which you are a member must own the shares. As a rule, you must have owned the business for more than 24 months, and you must have used your company’s assets mainly in an active business primarily acting in Canada. This last rule excludes companies that have only passive investments. Other technical rules may apply to your specific case, so it’s a good idea to check with the Canada Revenue Agency (CRA) or a tax professional before you finalize a sale of shares.
How to Claim the Capital Gains Exemption
To claim the exemption on qualifying shares, begin by completing Schedule 3 and attaching it to your income tax return. Fill out the name of the company, the number and class of the shares you sold, the acquisition year, the sale price, and the adjusted cost base, which is the actual price the buyer paid. In addition, mention any costs, such as legal fees, associated with the sale. If you claimed a part of the exemption in the past, you must write it in. Not sure? Find your cumulative balance in your CRA My Account portal, or contact the CRA to have them look it up in your file.
When you sell your small business, the lifetime capital gains exemption can give you a big tax break. By claiming the exemption on a current or future sale, you can reduce the tax burden on your company. QuickBooks Online can help you maximize your tax deductions. Keep more of what you earn today.