Staying on side

Canadian Tax Law allows a capital gains exemption on the sale of shares of a Canadian Small Business. This exemption is 800k plus depending on the year of sale. This is a huge benefit to the business owner who is looking at retirement through the sale of his business. On the sale of the shares in his business the first 800k is not taxed.

To be eligible there are certain rules that must be followed. The one that causes a lot of grief is what we call the “ 50/90 rule ‘. This rule states that during the two years before the sale of the company at least 50% or more of the company’s assets must have been used for the normal operation of the company. At the date of sale 90% of the assets must be used for the normal operation of the company.

This becomes a problem when historically a company has been making money and keeping it in cash or other investments. In many cases surplus money is distributed out to the owner on an annual basis and therefore this is not a problem. However in other cases the owner may allow these non-operating assets to grow and become more than 50% of the asset base..

This problem can be alleviated by disbursing this money to the owner or setting up a separate holding company or Family Trust. A lot depends on how big the company is and how much money we are looking at.. Please ask the advice of a professional if you are unsure.