Riscario

An individual (but not a corporation such as a holding company or trust) can realize up to $750,000 of capital gains tax-free from a

• Qualified Small Business Corporation
• Qualified Farm Property

This is an outright exemption, not a deferral of tax. The exemption was $500,000 until March 2007. The exemption is reduced by the earlier $100,000 exemption on other property.

The exemption is often crystallized when an estate freeze is implemented. There are potential complications if

• limits if there is a Cumulative Net Investment Loss (CNIL) since 1987
• Alternate Minimum Tax (AMT): must then include the entrire capital gain (i.e., taxable portion = 100%)

Eligibility

Ownership of holding companies and operating companeis is analyzed on a consolidated basis

Qualified Small Business Corporation

There are three criteria

1. a Canadian-Controlled Private Corporation (CCPC) during the preceding 24 months
   • 50% of shared owned by a Canadian taxpayer or related party (not by publicly-traded corporations)
   • shares held privately (not traded on a public exchange)
2. at least 90% of the Fair Market Value (FMV) of assets used in the active business
   • during the 24 months before the share disposition, at least 50% of the FMV of assets must be used in the active business conducted primarily in Canada
     • inactive business assets: cash and other liquid investments, cash value of corporately-owned life insurance
     • this condition is least likely to be met, but usually solvable
3. carrying on an active business primarily in Canada

Qualified Farm Property

• land in Canada which is used for active farming on a regular and continuous basis by the taxpayer, the taxpayer's spouse or the taxpayer's children
• includes interest in a family farm partnership or corporation

History