If you own a Canadian business, you have probably heard something about the capital gain deduction (or capital gain exemption). In my practice, clients are often surprised to learn it is not available to all businesses in all situations.
A capital gain arises when you sell certain properties for more than you paid for them. A capital gain deduction can be used to shelter up to $750,000 of capital gains of an individual over your lifetime on qualified farm property, qualified fishing properties and qualified small business corporation shares. This lifetime limit of $750,000 is available to all Canadian residents, and is worth up to 174,000 in taxes saved in Manitoba. A capital gain deduction is available to individuals; therefore, if you have a holding company that sells the operating company, the capital gain exemption cannot be used as it is not available to a company when selling shares or other property
When an individual uses the capital gain deduction, it is reduced by certain types of losses such as allowable business investment losses and cumulative net investment losses. If you plan to use the capital gain deduction, carefully consider the amount available to shelter the capital gain from tax. Also, you will likely be subject to the alternative minimum tax, which is refundable over the next seven years, thus is not an outright tax cost, but it is a cash flow consideration.
The rules around what qualifies for the capital gain deduction are complex, and must be reviewed periodically to ensure that your business continues to qualify for the capital gain deduction. In all situations, the property must have been owned by you or certain other related people in the last two years.
Qualified Farm Property
A farmer can use the capital gain deduction to shelter the capital gains arising on the sale of certain farmland and buildings, family farm corporations, family farm partnerships, and certain other properties such as quota, provided the property has met the requirements of being used in the farming business.
Qualified Fishing Property
A fisherman can use the capital gain deduction to shelter capital gains on the sale of certain real property and fishing vessels, family fishing corporations, family fishing partnerships and certain other properties, provided the criteria has been met to be a fishing business.
Qualified Small Business Corporation Share
Shares of a private company that carries on business in Canada, and has more than 90% of the value of its assets being used in active business in Canada at the time of sale may qualify for the capital gain deduction if you have held the shares for at least two years. During the two year period immediately prior to the sale, more than half of all of the value of the assets must have been used in the active business in Canada.
When selling a business, the capital gain deduction cannot be used to shelter the tax on an asset sale, as the exemption shelters a capital gain on shares. However, it may be possible to use the capital gain deduction before you sell the assets, but this must be considered in your overall estate and succession plan.
There are many planning opportunities to consider in using the capital gain deduction. If you have questions whether your property qualifies for the use of the capital gain deduction, or planning on how to use it, please consult your local MNP advisor or contact Derek Innis, CA at 204.788.6093 and we would be happy to assist you.
About Kim Drever and Meyers Norris Penny LLP:
Kim Drever, CA, is a Partner, Taxation Services, with MNP. Click here to contact her.
MNP is one of the largest chartered accountancy and business advisory firms in Canada, providing client-focused accounting, taxation and business advice. MNP has proudly served mid-market public and private companies for more than 60 years. Through the development of strong relationships, MNP provides organizations with personalized strategies and a local perspective to help clients succeed. For more information, visit http://www.mnp.ca/