Does the lifetime capital gains exemption apply when I sell business assets instead of shares?

The CRA’s line 25400 page describes the lifetime capital gains deduction as half of the lifetime capital gains exemption (LCGE). Owners ask whether it still applies when the deal is a sale of the business’s assets rather than its shares. The short version is that the deduction is attached to particular kinds of property, and ordinary business assets are not on that list. How your deal is built therefore matters before you agree to it.

What the deduction attaches to

The CRA’s line 25400 page says you may be able to claim the deduction on taxable capital gains from dispositions of qualified small business corporation shares or of qualified farm or fishing property (including reserves and trust allocations relating to them), if you meet its conditions, such as being resident in Canada throughout the year. The Income Tax Act defines a qualified small business corporation share in s.110.6(1). At the time of sale it must be a share of a small business corporation owned by the individual, the individual’s spouse or common-law partner, or a partnership related to the individual. Throughout the preceding 24 months it must not have been owned by anyone other than the individual or a related person or partnership, and it must also meet an asset test for that period, subject to the exceptions in the definition.

Why selling assets changes the question

Outside farm or fishing property, the deduction looks at shares, so an asset sale leaves you asking whether you personally dispose of anything that qualifies. If a corporation sells its assets, ask your accountant what you, as shareholder, then hold and how it is taxed when funds reach you. The CRA’s capital gains guide also says capital property does not include the trading assets of a business, such as inventory, so on the guide’s own definitions, inventory sold does not produce a capital gain.

Recapture is income, not a gain

The same guide says that if the undepreciated capital cost of a class has a negative balance at year end, the amount is a recapture of capital cost allowance, and you include it in your income for the year of sale. The CRA’s page on selling a business adds that you may have a recapture or a terminal loss on a sale of assets. Ask your accountant which assets you sold and whether any of the gain is really recapture.

Questions before you choose a structure

• Does anything I personally sell meet the qualified small business corporation share definition?
• Are any of the assets qualified farm or fishing property?
• How much of the price is for inventory, depreciable assets and goodwill?
• Would a different structure change who is disposing of what?

For the exemption itself, see Lifetime capital gains exemption (LCGE).