QUALIFIED SMALL BUSINESS CORPORATION SHARES

Neufeld Legal PC: Chris@NeufeldLegal.com - 403-400-4092 / 905-616-8864

For the owner of a small business to attain the tax benefits of the Lifetime Capital Gains Exemption, not only must the transactional documentation be appropriately drafted to be compliant with the federal government's tax legislation, it must also meet precise structural and operational requirements, including the applicable shares being Qualified Small Business Corporation Shares, failing which those significant tax benefits could be subject to intense scrutiny from Revenue Canada, and its potential denial. As such, it is imperative that the structural requirements for a Lifetime Capital Gains Exemption, such as Qualified Small Business Corporation Shares are properly understood and the applicable requirements of the tax legislation are strictly complied with.

A share of a corporation will be considered to be a Qualified Small Business Corporation Share if all the following conditions are met:

  • at the time of sale, it was a share of the capital stock of a small business corporation, and it was owned by the taxpayer, their spouse or common-law partner, or a partnership of which the taxpayer was a member; and

  • throughout that part of the 24 months immediately before the share was disposed of, while the share was owned by the taxpayer, a partnership of which the taxpayer was a member, or a person related to the taxpayer, it was a share of a Canadian-controlled private corporation and more than 50% of the fair market value of the assets of the corporation were:

    • used mainly in an active business carried on primarily in Canada by the Canadian-controlled private corporation, or by a related corporation

    • certain shares or debts of connected corporations

    • a combination of these two types of assets; and

  • throughout the 24 months immediately before the share was disposed of, no one owned the share other than the taxpayer, a partnership of which the taxpayer was a member or person related to the taxpayer.

Generally, when a corporation has issued shares after June 13, 1988, either to the taxpayer, to a partnership of which the taxpayer is a member, or to a person related to the taxpayer, a special situation exists. The Canada Revenue Agency considers that, immediately before the shares were issued, an unrelated person owned them. As a result, to meet the holding-period requirement, the shares cannot have been owned by any person other than the taxpayer, a partnership of which the taxpayer is a member, or a person related to the taxpayer for a 24-month period that begins after the shares were issued and that ends when the taxpayer sold them. However, this rule does not apply to shares issued in any of the following situations:

  • as payment for other shares

  • for dispositions of shares after June 17, 1987, as payment of a stock dividend

  • in connection with a property that the taxpayer, a partnership of which the taxpayer was a member, or a person related to the taxpayer disposed of to the corporation that issued the shares. The property disposed of must have consisted of either:

    • all or most (90% or more) of the assets used in an active business carried on either by the taxpayer, the members of the partnership of which the taxpayer was a member, or the person related to the taxpayer, or

    • an interest in a partnership where all or most (90% or more) of the partnership's assets were used in an active business carried on by the members of the partnership.

Professional Tax Consultation: The rules for the Lifetime Capital Gains Exemption are complex. It is highly recommended to seek advice from a tax professional to determine eligibility and to plan a disposition to maximize the benefit of the exemption, while considering other available tax planning options to determine the best long-term strategy for the particular transaction.

For knowledgeable and experienced legal representation for strategic tax planning, including the optimization of the lifetime capital gains exemption, contact tax lawyer Christopher R. Neufeld at Chris@NeufeldLegal.com or call 403-400-4092 (Calgary, Alberta) / 905-616-8864 (Toronto, Ontario).

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