Update on Capital Gains Exemption & QSBC Shares

Canadian taxpayers benefit from a lifetime capital gains exemption (LCGE) when selling:

• Qualified Small Business Corporation (QSBC) shares
• Qualified farm or fishing property

Update (2024–2025)

• The exemption increased from $1,016,836 to $1,250,000 (effective June 25, 2024)
• The new limit is indexed to inflation
• Applies to dispositions after that date

What Qualifies as QSBC Shares?

To qualify under the Income Tax Act, shares must meet three tests:

1. 90% Test (at sale):
   At least 90% of assets used in an active business in Canada
2. 50% Test (preceding 24 months):
   At least 50% of assets used in an active Canadian business
3. Ownership Test:
   Shares must be owned by the individual or a related person for 24 months

Active Business Requirement

An active business excludes:

• Passive investment businesses (interest, dividends, etc.)
• Personal service businesses

Holding companies earning only passive income generally do not qualify.

If the Tests Aren’t Met

Corporations may “purify” assets (e.g., remove excess cash/passive investments) to qualify.

If purification is needed for the 50% Test, a 24-month waiting period applies before selling shares.

Planning Insights

• On death, taxpayers are deemed to dispose of assets at fair market value
• The increased exemption helps reduce terminal tax liability
• Family trusts can multiply access to the exemption across beneficiaries

Important Consideration

The LCGE increase to $1,250,000, providing enhanced tax savings and planning opportunities for business owners and their families.

Brian Madigan LL.B., Broker

www.OntarioRealEstateSource.com