What Are Capital Gains or Losses? (Canada)

You have spent all your life building your business into an enterprise worth millions. After years of hard work, you finally decide to retire and spend time with your family or better still, decide to venture into a different business. The value built up in your business will be taxed. However, the income tax act provides you with an opportunity to save on taxes through the capital gains exemption.


Small business owners can take advantage of the capital gains exemption when you sell your business. The exemption is $750,000 of the gross capital gain which is equal to $375,000 of the taxable gain. Capital gains are the proceeds you receive when you sell your business less the amount you paid for it. In Canada, only half of the capital gains are taxable. In order to qualify for the capital gains exemption, you have to meet following criteria;

Qualified Small Business Corporation

First of all, the business must be a qualified small business corporation. Certain conditions must be met before you sell your business and at the point of sale. These conditions include the following;

* The shares must not be owned by anyone else other than your spouse or your partner at common law in the 24 months preceding the sale.

* 24 months prior to the sale, at least 50% of the assets must have been used (directly or indirectly) in active business in Canada or used to finance an active business in Canada. If you have invested more than 50% in a foreign country, then you will not qualify for the capital gains exemption.

* At the time of disposition, 90% of your assets must be used (directly or indirectly) in an active business in Canada.

If you run a sole proprietorship and not corporation, you too can benefit from the exemption. However, you will have to convert your business into a corporation and transfer all your assets to that corporation. It is a complex process but if you plan well in advance, you too can benefit from the capital gains exemption.

Increasing Exemption

If you have a large business corporation, you can go beyond the $750,000 exemption which means that you will be able to save even more money. This exemption is known as the Lifetime Capital Gains Exemption. In order to qualify for this exemption, you must meet all the conditions set forth in the Capital Gains Exemption section. Generally, you should issue shares to your wife and children and ensure that their shares are held long enough so as appreciate beyond their original value. It is possible to even double the exemption.

If you want to sell your business, you should prepare in advance. Talk to experts and most importantly, talk to your accountant and find out whether you will qualify for the exemptions. Factor in the tax implications of the sale. At the end of the day, you should ask yourself whether you stand to gain from the sale or not. If a large percentage of the proceeds will be paid as taxes, then there is no need to sell your business. Wait a few more years and then sell it.