Tax for Estate Planners: The Lifetime Capital Gains Exemption

The starting point for any estate file is taking inventory: what’s in the estate? Different assets will have their own unique issues and opportunities from an estate perspective.

The same is true for tax.

If your client owns shares in a corporation that will be part of their estate, the lifetime capital gains exemption (the “LCGE”) could offer significant tax savings. However, this exemption can only be use if properly planned while the client is still alive.

This note provides estate practitioners with an overview of the LCGE to help you identify its benefits, anticipate potential issues, and ensure your client’s estate is structured to maximize this exemption when the time comes.

LCGE: what is it and how to get it?

The LCGE is an exemption for the sale of a “qualifying small business corporation share”. At time of writing, the exemption amount is $1.25 million, potentially translating into $450,000 in tax savings. However, this could revert to approximately $900,000 if changes to the capital gains inclusion rate are reversed.

There are, in short, three tests.

1.      Did the taxpayer own the shares for two years prior to the “sale” date (or date of death)?

This is the simplest test. It only becomes an issue if the client just acquired the shares and might be on the verge of passing away. Otherwise, your client should satisfy this requirement.

2.      Throughout the 24 month period prior to the “sale” date, were greater than 50% of the assets of the corporation used in an “active business”?

An active business, in paraphrase, is one that is labour-intensive. Think selling products, providing services or manufacturing goods.

What clearly is not an active business is earning passive income. Holding securities or GICs in a portfolio is not an active business. Nor (typically) is earning rental income from a condo or other real estate.

3.      On the “sale” date, was the corporation a “small business corporation”?

This is a corporation where 90% (more or less) of its assets are “active business assets”.

This is a very high threshold. When I’m planning for an actual sale with my clients, I can prepare my client for this. However, in this case the “sale” will only occur when your client passes away. For this reason, the best way forward might be to purify the corporation immediately to 90%, or perhaps suggest selling before the client passes away.

Questions

To summarize, here are the list of comments/questions for your client on the LCGE:

1.      There’s an exemption called the lifetime capital gains exemption for the sale of shares of certain businesses. The exemption is potentially up to $1.25M, with potential pure tax savings of around $450,000. Let’s see if we can get that for you?

2.      What is in the corporation? Is there a business? What type of business? Is it active? (You may want to ask to see financial statements.)

3.      If the business is active, are there other assets in the company not used in the business, like cash, securities or real estate? (These could potentially swamp the value of the business and cause the test to not be met.)

If it looks like LCGE might work for the client, you can tell them to talk to their tax lawyer or accountant. The tax advisor may suggest at this time that they purify (to get the desired asset mix) using dividends. They could, potentially, insert a trust with a holdco beneficiary. They might also be able to do what’s called a “butterfly”, where you split out assets of the corporation.

If you have any further questions about the LCGE (or tax questions related to estate planning or corporations), you can feel free to reach out to us. The author can be contacted directly at jonathan@rkwlaw.ca or 604.425.1123.