The capital gains exemption has never been worth more. With a tax rate on capital gains of around 36% and the new limit of $1,250,000, that is $450,000 in tax savings for each and every person who can claim the full amount.
It's time for a hard look at the rules for the capital gains exemption and a close review of client situations. Many factors can prevent the exemption from being available. They include:
- Accumulation of large amounts of surplus funds
- A holding company with other assets (e.g., real estate)
- A foreign subsidiary tucked under the Canadian operating company
- Past sins, such as ABILs or persistent investment expense, leading to a so-called CNIL balance
- A bad corporate structure, such as having two separate companies under a holding company, can destroy all hope of claiming the exemption
Remember that to claim the exemption, shares must be sold by an individual, including a trust where the gain is allocated and paid out (or made payable) to individual beneficiaries. It is not possible to break up a corporate structure with a sale in mind via a butterfly reorganization, as this is prevented by anti-avoidance rules. So make sure the structure is set up for success, well before a sale is considered.
In addition to making sure there is a clear path to claiming the exemption, can it be multiplied? Yes, it can, with a number of techniques. But these plans often require time; to grow the value in the hands of others, including a trust, and meet the 24-month holding period requirement.
These techniques can include a simple sale to other family members as a preliminary step, or a freeze type structure to place growth shares in the hands of others, including, commonly, a trust. But value cannot be passed on tax-free; the value needs to grow in the hands of the new owners. That can take time.
Remember as well that there are new rules on succession of a family business. If structured in the right way, parents can claim the capital gains exemption even if the payment is made with corporate funds. This is challenging to do, but possible. To start, you need to understand the rules that apply and true to form, they are not simple.
The capital gains exemption can be combined with the new Canadian Entrepreneurs Incentive as well. That allows a 1/3rd capital gains inclusion rate on up to $2,000,000 of gain per individual if the conditions are met. This is phased in over 5 years beginning in 2025, but plan now as there are multiple tests that look back as far as three years. This adds another $360,000 of tax savings. Combining the two can be worth $810,000 per individual!
So there is a lot at stake. It is now more important than ever to have a serious look at this topic and eliminate the risk that the structure will not comply.
Lastly, many clients assume that their structure will be suitable for all of these benefits and experience shows that they are bitterly disappointed when told it doesn’t.
2 hours will be well spent in our Tax Seminar Series for a nuts-and-bolts review of the exemption. You will not only benefit from a refresher on the rules, but you will also come away with a wide range of planning ideas. The capital gains exemption is covered in Module E of our 2024 Tax Seminar Series.
Each year, we put on a Tax Seminar Series with important updates and tax planning ideas. It has been attended by thousands of CPAs over the years. Most repeat year after year. Save your spot and get the gold standard of tax education.
View the 2024 Tax Seminar Series Agenda: https://seminars.cadesky.com/pages/2024-modules