If you have a capital gain, you have to file a tax return and show the gain. Remember to split any capital gains within your family.

50% of capital gains are taxable.

Take advantage of all tax fee earnings. Look to capital gains, or to receive dividends as a method of reducing the amount of taxes you pay. As a corporation, you can claim one quarter of your declared dividends as tax free income. The remaining three quarters are taxed at a lower rate than regular income and can be included in your tax free capital gains.

You can still get the $100,000 tax free capital gains exemption by selling shares in a qualified Canadian small business or qualified farm property. Get the advice of experts if you are considering this.

$500,000.00 of capital gains exemptions are available from the sale of shares in a corporation.

It’s important to note that you should partner your investments (this could be with your wife) so that the capital gains can be split. One partner could invest money cash and the other partner contribute service. This would allow a couple a lifetime gains of $200,000.00 in tax free income.

Capital Gains Exemption

In the 1994, federal budget eliminated the general $100,000 exemption for dispositions after February 22, 1994.

Since 1985, Canadian residents have been able to claim a special deduction to reduce or eliminate tax on up to $100,000 of capital gains. If the gain arose on the sale of shares of an SBC, an additional $400,000 is available.

To qualify for the $500,000 exemption, you must meet the following conditions:

The corporation must be a SBC at the time of the sale. More than 50% of the corporation’s assets must have been used in an active business carried on primarily in Canada throughout the 24 month period immediately prior to the sale.

The shares must not have been owned by anyone other than you or someone related to you during the 24 month period immediately before the sale. The corporation only needs to be an SBC at the time of sale; at least 90% of its assets must be business assets. You may want to consider triggering a disposition of your shares at a time when you are certain that the shares qualify for the capital gains exemption. Transferring your shares to a holding company and electing to realize a gain on the transfer can do this.

The shares taken transferred will establish a fixed cost, thereby reducing any future capital gains when you sell the shares to a third party, or on your death. Look to professional advice in carrying out this exercise. There are pitfalls to be aware of.
In abolishing the “lifetime” capital gains exemption for land, the government elected to have all gains from the date of acquisition of the land to the date of disposition prorated by the number of months. Gains up to March 1992 being tax free, assuming that there is room in the $100,000 ceiling for the seller. All gains for the remainder are taxable under the “normal” capital gains rules under which 50% of the gain becomes taxable at your ordinary marginal rate.

To understand this further, consider an example, of a piece of vacant land purchased in
January 1989 for $50,000 that appreciated in value to $100,000 by December 31, 1992.
The gain appears to be $50,000. If the land was not sold that year, you would assume, that when finally sold, the first $50,000 of the net gain should be tax free under the pre 1992 rules. This is not what happens. If, the land were sold for $125,000 in March
1995, the government would “prorate” the $75,000 gain at $1,000 per month over 75 months. Then they start calculating your allowance at the date of the actual purchase of the property. This means that the government would only be willing to accept a tax free appreciation of only $38,000 instead of the expected $50,000 for the 38 months prior to
February 1992.

This is just an unabashed tax grab that falls under the category of give it to make the population feel good, and take it back, in a way that is less noticeable, harder to understand, and underhanded manner.

Using the government’s actual formula, the non eligible capital gain is considered to be
$37,000 ($75,000 minus $38,000) of which $27,750 is brought into income and $11,100 is payable in taxes.

This is a “double tax.” Not only is the lifetime exemption reduced as to content of land, but also the implementation formula used in this case penalises the taxpayer with an additional tax bill. There is a tax at the time of the sale and the full amount of $11,100 is added to your income. This type of tax distortion will result only when the land appreciated at a faster rate before 1992 than after. You could argue that the land appreciated at a faster rate after 1992. Therefore the opposite conclusion could be reached. I wonder what the government was thinking about when they implemented this policy.

This is just a bold and unexpected step by the government in a series of protracted moves to completely outlaw the $100,000 lifetime gain, one of the only substantial forms of tax relief that Canadians have access to. Too bad we Canadians are so passive about our government activities.