Qualified small business corporation (QSBC) capital gains deduction

Shares of a qualified small business corporation (QSBC) continue to qualify for the capital gains deduction. To qualify as a QSBC, a company must be a Canadian- controlled private corporation and at least 90% of its assets must be used in an active business in Canada. There are additional conditions that must be met for up to two years before the sale. Further complications may arise where there are investments in related companies.

Each individual is entitled to a lifetime cumulative capital gains deduction of $824,17637. The maximum capital gains deduction available on the disposition of QSBC shares will be reduced by the amount of QSBC or other capital gains deductions previously claimed on any property.

The amount of capital gain that is eligible for the capital gains deduction may be affected by the balance in your cumulative net investment loss (CNIL) account (see topic 149) and if you have ever claimed an allowable business investment loss (ABIL) (see topic 142).

In some cases, it may be appropriate to consider various tax-planning techniques that can be used to obtain the deduction. The end result of most of these planning strategies will be to increase the cost base of your shares for purposes of a future sale or deemed disposition. Professional tax advice on these matters is essential.

Tax tip: For a company to qualify as a QSBC at the time of a future sale, it may be necessary to take steps now to remove from the company non-active business assets, such as excess cash or portfolio investments. This can be as easy as having the company use its excess cash to pay off debts or pay dividends to its shareholders, or it may involve a corporate reorganization to transfer the non-active assets into a separate company.

37 $800,000 as of 2014, but indexed for inflation after 2014. Therefore, for 2015 dispositions, the limit was $813,600. For dispositions on or after March 19, 2007 up to 2013 (inclusive), the lifetime limit was $750,000. Prior to March 19, 2007, the lifetime limit was $500,000.

Election for private companies going public

Shares of a public corporation do not qualify for the enhanced capital gains deduction. However, if you own shares in a small business corporation (SBC) that is about to go public, you can make an election to be treated as having disposed of all the shares of a class of the capital stock of the SBC immediately before it becomes a public corporation. The amount you can elect as the deemed proceeds of disposition can be anywhere between the cost and fair market value of the shares. The shares are deemed to be reacquired for the same amount. This will increase the adjusted cost base of the shares and reduce the amount of any future gain on those shares when they are ultimately disposed of.