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Home  ->  Business   ->   Lifetime Capital Gains Exemption -> Qualified small business corporation (SBC) shares

Qualified Small Business Corporation (SBC) Shares - Lifetime Capital Gains Exemption (LCGE)

Income Tax Act s. 110.6(1), S. 110.6(2.1)

How Much Is The Exemption?

What Are The Rules?

Small Business Corporation Shares Sold to Non-Resident or Public Corporation Resources

Canada Revenue Agency (CRA)  Resources

Tax Tips

How Much Is The Exemption?

An individual who owns shares in a qualifying small business corporation may be able to claim a $1 million+ lifetime capital gains exemption (LCGE) when those shares are sold.  The actual capital gains deduction is 50% of the capital gains exemption.

For annual maximums, see the Lifetime Capital Gains Exemption article.

What Are The Rules?

There are 2 main rules, one regarding ownership of the shares, and the second regarding the use of the assets of the corporation.

1.    Throughout  the 24 months immediately preceding disposition of the shares, the shares must not have been owned by anyone other than the individual or a person or partnership related to the individual.  The shares may be newly-issued shares that have not been owned for a full 24 months, but they must not have been owned by an unrelated person or partnership in that time.  Unfortunately, s. 110.6(14)(f) deems newly-issued shares to be owned immediately before their issue by an unrelated person or partnership unless the shares were issued:

  1. as consideration for other shares,

  2. as part of a transaction or series of transactions in which the person or partnership disposed of property to the corporation that consisted of

    1. all or substantially all the assets used in an active business carried on by that person or the members of that partnership, or

    2. an interest in a partnership all or substantially all the assets of which were used in an active business carried on by the members of the partnership, or

  3. as payment of a stock dividend

2.    Throughout the 24 months immediately preceding disposition of the shares, more than 50% of the fair market value of the assets of the corporation must have been used principally in an active business carried on primarily in Canada by the corporation or a corporation related to it.  At the time of disposition of the shares, all or substantially all (90% as per CRA) of the fair market value of the assets must have been used in the active business.  Examples of assets that may not qualify as being used in an active business are stocks, bonds, and rental property.

If the individual dies and has a deemed disposal of the shares, at the time of death the shares may  not be qualified small business corporation shares because of the 90% rule.  In this case, the Income Tax Act provides that the shares may still qualify, if the corporation was a qualified small business corporation at any time in the 12-month period before the death of the individual.

See also the CRA guide T4037 Capital gains.

Small Business Corporation Shares Sold to Non-Resident or Public Corporation

The 2009 Budget measure included in Bill C-10 amended s. 256(9) so that it does not apply "for the purposes of determining if a corporation is, at any time, a small business corporation or a Canadian-controlled private corporation".  Thus, the s. 256(9) issue outlined below seems to be resolved.

Prior to a Federal 2009 Budget measure, when SBC shares SBC were sold to a non-resident or to a public corporation, there could have been a resulting denial of the capital gains exemption.  This is because s. 256(9) of the Income Tax Act deemed that where control of a corporation is acquired, it is deemed to be acquired at the commencement of the business day.  The result was that when the shares are sold, they are deemed to be under the control of the purchaser, which is not a qualifying SBC.  A taxpayer could have elected to have s. 256(9) not apply, but this could cause other complications.  A Federal Court of Appeal case dealing with s. 256(9) is La Survivance v. Canada 2006 FCA 129.  CRA issued Technical Interpretation 2006-0214781E5, which deals with s. 256(9) and the capital gains deduction.

It is imperative to get advice from a tax professional (Chartered Professional Accountant or Tax Lawyer) experienced in this area well in advance of making a sale of qualified SBC shares. Resources

Lifetime Capital Gains Exemption / Alternative Minimum Tax / Intergenerational Transfers

Canada Revenue Agency (CRA)  Resources

Line 25400 (line 254 prior to 2019) - Capital gains deduction

Tax Tips:

Be careful to minimize the assets in your corporation that are NOT used to produce active business income, such as cash, investments, shareholders loans, rental property, etc.

This is complicated and can save more than $200,000 in taxes - do it right and get professional advice - well in advance!

Revised: December 12, 2023


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