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What is the $750,000 lifetime Capital Gain Exemption?
Post Date: Jul. 13, 2014
One particular tax planning technique available to business owners selling their private companies is the lifetime capital gains exemption on the sale of Qualified Small Business Corporation (QSBC) shares. The lifetime capital gains exemption is an economic incentive to help raise the level of investment in small businesses. If an individual sells Qualified Small Business Corporation shares for a profit, the first $750,000 of the capital gain can be received tax-free. This is a lifetime exemption, meaning an individual can only shelter up to a maximum of $750,000. There are specific conditions that must be met for shares of a corporation to be classified as QSBC shares. It is important to undertake some advance planning to ensure eligibility for the exemption. To qualify for the exemption, you must meet two tests. 

The first test is that your corporation must be a "small business corporation" at the time of sale. That means that it must be a Canadian-Controlled Private Corporation (CCPC) and all or substantially all of its assets must be used in an active business carried on primarily in Canada. The Canada Revenue Agency (CRA) interprets "all or substantially all" to mean that assets representing at least 90% of the fair market value of all corporate assets must be used for active business purposes. 

The other test you must meet to qualify for the exemption is that more than 50% of the fair market value of the corporation's assets must have been used in an active business carried on primarily in Canada throughout the 24-month period immediately before the sale, and the shares must not have been owned by anyone other than you or someone related to you during the 24-month period immediately before the sale. If both tests are satisfied, you may be able to claim the exemption on your tax return in the year of the sale.