Capital Gains Exemption on Small Business Shares Increases

Indexation has increased the capital gains exemption available on the sale of qualified small business shares in 2017 by an additional $11,540, to $835,716. The capital gains exemption on the sale of qualified farm or fishing property remains at $1,000,000.

In 2014, the capital gains exemption was raised from $750,000 to $800,000 and became subject to indexation. Then, in the 2015 federal budget, the exemption for qualified farm and fishing property was raised to $1,000,000 beginning April 20, 2015, but this amount is not subject to indexation. However, once the indexed exemption for qualified small business shares exceeds $1,000,000, the exemption for farm and fishing property will become indexed as well. Depending on inflation rates, this should happen in about ten years.

These amounts are the lifetime maximum that can be claimed by any taxpayer. If a taxpayer has a qualifying gain and requires only part of the available exemption, the unused part may be claimed at a later date should they have another qualifying gain. There is only one lifetime exemption amount available to any taxpayer, so the use of the exemption on the sale of small business shares, for example, will reduce the exemption available on the subsequent sale of a farm.

For the sale of shares in a small business corporation to qualify, the shares must meet these criteria:

• They must be shares of a small business corporation that were not owned by anyone other than the taxpayer, the taxpayer’s spouse or common-law partner, or a partnership related to the taxpayer, during the 24-month period preceding the date of disposition.
• At the time of the disposition, the corporation must be a small business corporation. That is, a corporation of which all or substantially all (90% or more) of the assets (on a fair market value basis) are used principally (more than 50%) in an active business carried on primarily (also more than 50%) in Canada.
• During the 24-month period prior to the disposition, the corporation’s assets (on a fair market value basis) were used primarily (more than 50%) in an active business carried on primarily in Canada.
• During the 24-month period prior to disposition, the shares were shares in a Canadian controlled private corporation.

For the sale of farm or fishing property to qualify for the larger exemption, the property must be one of the following:

• An interest in a family farm partnership owned by the taxpayer or the taxpayer’s spouse or common-law partner
• Shares in a family farm corporation owned by the taxpayer or the taxpayer’s spouse or common-law partner
• Real property (e.g., land, buildings, eligible capital property such as quotas) that was used
  • in the business of farming by the taxpayer, spouse (or common-law partner), child, or parent in the preceding 24 months prior to disposition; gross farming income must also exceed income from all other sources for at least two years, or
  • by a family farm corporation or a family farm partnership of the taxpayer, the taxpayer’s spouse, common-law partner, child or parent that has farming as a principal business for at least 24 months prior to the disposition.

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