How To Ensure Rental Income Within Your Corporation is Active Business Income
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Home » News » Canadian Tax FAQs » Lifetime Capital Gains Exemption
Question:
How is the Lifetime Capital Gains Exemption used when selling a business?
Facts:
There are two methods to sell a business:
An asset sale and a share sale will both generate taxable income. With an asset sale, if the sale proceeds are greater than the cost, the company will have a capital gain generated inside the company. Half this gain will be taxable and half can be paid out to the shareholders tax-free through the capital dividend account. The remaining proceeds from the sale that do not qualify for the capital dividend will be taxed in the hands of the shareholder as they draw them out of the company.
Please note that the sale of property, plant and equipment may trigger recapture or terminal loss. With a share sale, the shareholder will have a capital gain generated in their personal hands. However, if the company is a Qualified Small Business Corporation (QSBC) and the shareholder is an Individual Canadian resident then the shareholder may be able to claim an exemption. A QSBC is a Canadian Controlled Private Company where:
The current Lifetime Capital Gains Exemption is $913,630 for 2022 and it is indexed every year for inflation. This basically means that at the high rate of personal tax the exemption saves approximately $201,000 in taxes.
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Canadian and foreign tax laws are complex and have a tendency to change on a frequent basis. As such, the content published above is believed to be accurate as of the date of this post. Before implementing any tax planning, please seek professional advice from a qualified tax professional. Empire, Chartered Professional Accountants will not accept any liability for any tax ramifications that may result from acting based on the information contained above.
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