Every resident of Canada is given a lifetime $750,000 capital gains exemption amount. This means that you may have up to $750,000 in capital gains (excess of selling price over original price of the shares) and not pay tax on the earnings.
A gain occurs on the sale of shares when the gains (i.e. Selling price) is greater than the original cost plus any costs to sell (i.e. Commissions). 50% of this gain is added to your earnings and taxed. The capital gains exemption allows you to have $750,000 in capital gains, which is the same as $375,000 in taxable capital gains.
You deduct $750,000 from your capital gain and then divide the remainder by 2 and pay tax on that amount. If your capital gain is less than $750,000, you use the exemption to bring your capital gain to 0, and you pay no tax on the transaction and you have more deduction room to use in the future.
These following 3 tests must be passed to be allowed to use this exemption:
- Qualified Small Business Corporation test
* The company must be a Canadian Controlled (aka the shareholder is Canadian), Private (i.e. Shares aren't traded on a stock exchange) Corporation, or "CCPC"
* Ninety percent of the market valuation of the assets of the enterprise must be employed for current active business carried out within Canada when the shares are sold.
- 24-month Holding Period test
* In the two years before the sale, the shares must have been all owned either by the sole shareholder or a person or partnership related to them
- 50% of Assets test
* This test requires that a minimum one half of the market valuation of the assets in the corporation must be employed for current active business carried out within Canada for the twenty four months before the sale of the enterprise.
To learn more about the Canadian Capital Gains Exemption contact a local accounting firm.
A gain occurs on the sale of shares when the gains (i.e. Selling price) is greater than the original cost plus any costs to sell (i.e. Commissions). 50% of this gain is added to your earnings and taxed. The capital gains exemption allows you to have $750,000 in capital gains, which is the same as $375,000 in taxable capital gains.
You deduct $750,000 from your capital gain and then divide the remainder by 2 and pay tax on that amount. If your capital gain is less than $750,000, you use the exemption to bring your capital gain to 0, and you pay no tax on the transaction and you have more deduction room to use in the future.
These following 3 tests must be passed to be allowed to use this exemption:
- Qualified Small Business Corporation test
* The company must be a Canadian Controlled (aka the shareholder is Canadian), Private (i.e. Shares aren't traded on a stock exchange) Corporation, or "CCPC"
* Ninety percent of the market valuation of the assets of the enterprise must be employed for current active business carried out within Canada when the shares are sold.
- 24-month Holding Period test
* In the two years before the sale, the shares must have been all owned either by the sole shareholder or a person or partnership related to them
- 50% of Assets test
* This test requires that a minimum one half of the market valuation of the assets in the corporation must be employed for current active business carried out within Canada for the twenty four months before the sale of the enterprise.
To learn more about the Canadian Capital Gains Exemption contact a local accounting firm.
About the Author:
Rob Green is a freelance writer who works with Vancouver accountants TWM & Co. He writes regular accounting articles covering a big range of Canadian accounting procedures, practices and laws.