Guide
Extra cash in your company can cost you your tax exemption
Start two to three years before you sell.
Extra cash or investments in your company can cost you the lifetime capital gains exemption (LCGE) when you sell your shares. Fixing it takes planning, so start two to three years early.
General information only, not tax advice. Your accountant should lead this.
The tests, in plain words
The exemption can apply when you sell shares of a qualified small business corporation. To qualify, the company has to pass asset tests set by the Canada Revenue Agency (CRA):
- At the time of sale: 90% or more of the company’s assets, by fair market value, are used mainly in an active business carried on mainly in Canada.
- Over the 24 months before the sale: more than 50% of the asset value was in active business use.
- Over the same 24 months: no one other than you, or someone related to you, owned the shares.
See the CRA definitions and the CRA deduction limit.
A worked example
Example only, not a real business.
A company has $1,500,000 in active business assets: equipment, receivables, goodwill. Over good years it has also built up $400,000 in a term deposit it doesn’t need. That’s $400,000 out of $1,900,000, or about 21% of the assets, not used in the business. The company fails the 90% test at the time of sale. Moving that cash out, often called purification, can be done, but the 24-month test means it has to start well before a sale.
What to ask your accountant
- Would my shares qualify today? If not, what’s in the way?
- How and when should extra cash or investments come out?
- Does it make sense for family members to own shares, and how early?
- Would an asset sale or a share sale suit me better? See asset sale or share sale.