Lifetime capital gains exemption can save you hundreds of thousands in taxes
You’ve no doubt heard the saying by Benjamin Franklin: “In this world nothing can be said to be certain, except death and taxes.” Though the expression rings true, there are many strategies available to reduce the amount of taxes you would otherwise pay over your lifetime. One of these strategies is taking full advantage of your lifetime capital gains exemption.
Every resident in Canada currently has access to a lifetime capital gains exemption that can shield a cumulative maximum of $800,000 (1,000,000 for farmers and fishermen) in capital gains from income tax during lifetime. It is also available on death to the extent it was not used during lifetime.
Regrettably, the exemption is limited to the disposition of only certain types of property, including:
• Shares in a qualified small business corporation (QSBC)
• Qualified farm property, and
• Qualified fishing property.
If you are a business owner, a farmer or a commercial fisher, you may be in luck. But proceed with caution! The rules are complex and many factors must be taken into consideration when determining if your property is “qualified” property.
For example, in order to claim the capital gains exemption on a disposition of shares in your QSBC, you generally must meet the following requirements:
• The shares must have been owned by you (or by a person or partnership related to you) for a period of at least 24 months immediately preceding the disposition;
• During that 24-month period, more than 50% of the fair market value of the corporation’s assets must have been used to earn active business income carried on in Canada at least 50% of the time; and
• At the time of disposition, generally at least 90% of the fair market value of the corporation’s assets must have been used to earn active business income.
If you are a farmer in the general sense of the word, take solace in the fact that your farm property will quite likely qualify for the exemption. If you are not, keep in mind that the Canada Revenue Agency’s interpretation of farming activities is rather generous. If, for example, you raise race horses, grow Christmas trees, operate a vineyard or run a wild-game reserve, get professional advice as your property may still qualify.
If you know your property is qualified property, there are many planning opportunities available to “lock in” your exemption and even benefit from the exemptions of your spouse and children.
Even if you operate an unincorporated business, you may still be able to access your exemption, with careful tax planning.
Long-term planning is necessary to maximize the use of the lifetime capital gains exemption. An ounce of planning is worth a pound of cure, so speak to your advisor today. Your tax savings could be substantial.
– By Adrian C. Spitters, FCSI®, CFP®, FMA