Are you ready to retire after many years of building a successful business? Wouldn’t it be nice to cash out without attracting a huge tax bill?
According to Chartered Accountant Sonja Chong, Partner, Harris & Chong LLP in Toronto, this may be possible if you are selling shares of Qualified Small Business Corporations (QSBC) – and especially if you have structured your affairs to take advantage of the $750,000 lifetime capital-gains exemption available to every resident individual.
“If you have capital gains from the sale of QSBC shares, up to $750,000 of exemption is available for deduction against such gains.”
To be a QSBC, three key conditions (among others) must be met:
The company must be a Canadian-controlled private corporation with at least 90 per cent by fair value of its assets (including goodwill) being used in an active business carried on primarily in Canada at the time of sale.
At least 50 per cent by fair value of its assets (including goodwill) must be similarly used over a consecutive 24-month period immediately prior to sale.
The shares must have been owned, over a consecutive 24-month period immediately prior to sale, by you or persons related to you.
“The key is to plan ahead and structure the shareholding effectively at the outset, or freeze and modify the interests of current shareholders at the opportune time. The freeze, in combination with the use of trusts, allows family members to become shareholders with nominal investments,” advises Chong.
“The subsequent increase in value (and corresponding capital gain) can be spread among family members, each entitled to the $750,000 capital-gains exemption. When a trust realizes an eligible gain, it can be allocated to trust beneficiaries so they can each claim an exemption. This represents a maximum tax savings of almost $700,000 for a typical family of four.”
Brought to you by the Institute of Chartered Accountants of Ontario.
The Institute of Chartered Accountants of Ontario is the qualifying and regulatory body of Ontario’s 33,000 Chartered Accountants and 5,000 CA students. Since 1879, the Institute has protected the public interest through the CA profession’s high standards of qualification and the enforcement of its rules of professional conduct. The Institute works in partnership with the other provincial Institutes of Chartered Accountants and the Canadian Institute of Chartered Accountants to provide national standards and programs that are used as examples around the world. </em>
