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Lifetime capital gains exemption

The LCGE exempts the first $835,716 of lifetime capital gains on the sale of qualifying small business corporation shares from tax. For qualified farm or fishing property, the exemption is $1 million.

The LCGE represents a tax expenditure of nearly half a billion dollars per year. Spiro argues that one of the issues with the LCGE is that the requirements to qualify are “not very stringent.” In order to claim the LCGE, the company is required to have been involved in active business activity (e.g. not primarily earning passive investment income) for at least two years prior to the sale.

He cites the example of an individual who may have accumulated retained earnings in a corporation that came from activities that would not otherwise qualify for the LCGE, such as by earning investment income, who can then use their capital to purchase a “safe operating business, such as a franchised coffee shop, and then re-sell it two years later, effectively converting their previous earnings into a tax-free capital gain.”

By doing some effective tax planning in advance through splitting the business ownership among members of a family, a couple with two kids may be able to realize more than $3 million tax-free, through the claiming of four LCGEs.

Consistent with his views on the reforms of the SBD, Spiro would redesign the LCGE so that it encourages more dynamic growth by small businesses.

In the meantime, small business owners who are worried that the government may somehow change or eliminate the LCGE in next week’s budget, are hurriedly exploring “crystallization” transactions that may allow them to access the exemption prior to the budget date. It would also have the potential benefit of taking advantage of the 50 per cent current capital gains inclusion rate to shelter any gains beyond the LCGE limit should the government decide to increase the inclusion rate in the budget.

Financial Post

Jamie.Golombek@cibc.com

Jamie Golombek, CPA, CA, CFP, CLU, TEP is the Managing Director, Tax & Estate Planning with CIBC Wealth Strategies Group in Toronto.