Nancy Graham August 24, 2017 Living in Retirement Personal Wealth What’s a “Business Capital Gains Exemption” (and What’s It to You)? A shout-out to my fellow business owners: Are you positioned to use your lifetime capital gains exemption? Seriously, it’s no dumb question if you’re wondering what I’m talking about to begin with. First, only some business structures qualify. Second, since it doesn’t come into play until you’re ready to sell, it may not be top of mind for you or your accountant when you’re mid-career. BUT! If you wait until the last minute to get the hang of your business capital gains exemption, it may be too late to use it. By investing a few short minutes today to learn how this powerful tax-saving tool might benefit you tomorrow, you may be able to keep more of your business sale profits, instead of seeing your life’s work spent on taxes. If you ask me, that’s a good deal any day of the week. So is my “No Dumb Questions” series, so I hope you’ll subscribe to it if you’ve not yet had the chance. Last April, I described the many details that come up when you’re thinking about selling your business. Even if an actual sale is a ways off, I recommend planning for it at least a couple of years out from when you hope to make a deal. Making best use of Canada’s Lifetime Capital Gains Exemption is one reason why you’ll want to take your time. Two questions: Is your business a Canadian-controlled private corporation, or CCPC? That is, do you own shares in a company that is controlled by Canadian residents? Second, is your business a qualified small business corporation, or QSBC? If you can say “yes” to both of these qualifiers, you’re in luck. When you sell your business, you, your business partners and family shareholders may each be eligible to wipe away significant dollars of the capital gains taxes otherwise due on the proceeds of the sale. Big picture, here’s how it works. Normally, when you sell shares in investments like stocks, bonds, mutual funds or ETFs, you must declare and pay taxes on half of the value of any capital gains you earn from the sale. But there’s an exception when you sell shares from your privately held business. For this, you may be eligible for a tax exemption on the capital gains incurred. As of 2017, you can exempt just over $835,000 in gains over your lifetime … or a cool million if you’re a farmer or fisherman. Because you’re only taxed on half of your capital gains, that actually represents about $417,500 you can shelter from taxes during your lifetime. If you’re in a [50%] tax bracket, that’s over $200,000 dollars saved. Plus, if other family members hold shares in your private corporation, they can exercise their lifetime capital gains exemption, and save similar amounts. How do I prepare to sell my business? Of course, as you might expect, there are plenty of catches, caveats, “gotta-haves” and “gotchas” to keep in mind. That’s why it’s worth preparing for your business sale at least a couple of years out. First, if you’re a sole proprietor or small business owner not yet structured to qualify for the exemption, you may want to restructure. That takes some time. Second, if you want to keep more of the proceeds of your business sale in your family coffers, you may want to expand the number of shareholders of your company. There are a number of rules on how long shares must be held by various parties before they qualify for the exemption. Third, there are additional steps to access the exemption. For example, only “active business income” assets count in the calculations, so you’ll need to have time to shift assets, such as in cash, loans, investments or rental property out of the company you plan to sell. In short, time and talented advice are a business owner’s best friends if you want to make the most of your lifetime capital gains exemption. Remember, I’m a business owner, ready to respond to more of your “No Dumb Questions.” Let me know what’s on your mind by commenting below. I publish a new video every two weeks. Share: Facebook Twitter LinkedIn Email IIROC AdvisorReport
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