AK/ADMS 4562.03 - CORPORATE TAX LECTURE 5 NOTES
– last updated September 23, 2014
Tonight's Topics and Problem Set
1. $800,000 QSBC capital gains exemption – Chapter 13 (13340 to 13355); s. 110.6
– see problems contained in these notes and
Problem set (in separate document)
2. Income Splitting with Family Members as Shareholders
3. Corporate Attribution Rules
- Chapter 13 (13390); S. 74.4
- see problems contained in these notes
Chapter 13, Multiple Choice Questions 6 and 7 and Exercises 8 and 10
1 $800,000 Lifetime Capital Gains Exemption (C.G.E.)
The March 21, 2013 federal budget has increased the C.G.E. to $800,000 starting in 2014. This amount, i.e., $800,000, will be indexed to inflation, i.e., it will be further increased, in 2015 and thereafter based on the rate of inflation.
(The 2007 federal budget increased the C.G.E. to $750,000 from $500,000 for dispositions that occur on or after March 19, 2007).
The availability of the $800,000 lifetime capital gains exemption is an advantage of incorporating a small business (a CCPC earning active business income in Canada). This same exemption is also available for capital gains on certain farming and fishing assets. This course will not focus on family farms or fishing properties.
Note that the $800,000 capital gains exemption is really a $400,000 taxable capital gains deduction because only ½ of a capital gain is included in income.
Each individual has a lifetime total $800,000 capital gains exemption (C.G.E.). Any previously utilized C.G.E.’s will reduce the balance remaining.
The actual amount in a given year that an individual can claim as a C.G.E. is a “least of” formula. This “least of” formula will reduce the amount of C.G.E. that a taxpayer can claim if there are any net capital losses in the year; or if there have been any allowable business investment losses (ABILs) claimed (in the year or in a prior year); or if there is a cumulative net investment loss (CNIL). The exact formula and the definition of CNIL will not be discussed in this course. For more information see FIT 13370.
The definition of a QSBC is in s. 110.6(1): see Exhibit 13-11 of FIT There are the three tests in the definition and hence three steps to determine whether shares are shares of a qualified small business corporation (QSBC) so that any capital gain on the sale of the shares are eligible for the $800,000 exemption:
1.1 Test 1: SBC Test - Is the company a small business corporation at the time of sale? - (at date of sale)
An SBC = a CCPC with > 90% assets @ FMV either
1. used principally (> 50%) in an active business carried on primarily (> 50%) in Canada by itself or a related [s.251(2)] corporation; and/or
2. shares or debt of other connected SBCs
(see definition of small business corporation in s. 248(1), Exhibit 13-10 of FIT
Two typical non-qualifying assets are
- investments which are not short term investments of working capital - vacant land held, but not used in the business
If the CCPC doesn't meet the 90% test you can "purify it" by getting rid of some of the non-qualifying assets - e.g., convert investments to cash and invest in active business assets or pay off debts or pay it out to shareholder (typically as a dividend) (must either use the cash in the active business or get rid of it)
The problem if often how to minimize tax in a purification - there often will be a capital gain on the sale of investments (and corporate tax) and personal tax if the after -tax amount is paid out to the shareholder as a salary or taxable dividend
Note that the capital loss on the disposition of shares or debt of an SBC qualifies as a business investment loss (BIL) and that 1/2 of a BIL is an allowable business investment loss (ABIL) [ss. 38(c), 39(1)(c)]. An ABIL is deductible against all types of income (not just taxable capital gains)
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