How are capital gains taxed when I sell my business?

Under the Income Tax Act a capital gain is not taxed in full: the taxable part is added to your income for the year. For a business owner, the first question is who owns what is being sold, because that decides whose gain it is.

How the gain is calculated

Under the Income Tax Act, the gain is the proceeds of disposition minus the adjusted cost base of the property and the outlays and expenses made to sell it. The adjusted cost base starts with what was paid and changes with later events. The CRA’s capital gains guide, T4037, explains how to calculate it and where to report it.

Only part of the gain is taxed

The Act includes a set portion of each gain in income, called the taxable capital gain. The federal government proposed raising that portion and then announced it would cancel the increase, according to the Canadian Federation of Independent Business. Portions and limits change, so confirm the current rule with the CRA before you model a sale.

Whose gain it is

In a share sale, the shareholder reports the gain on the shares. In an asset sale, the company or sole proprietor sells the assets, so the gain arises where they were held. Not every dollar is a capital gain. The CRA notes that selling business assets can produce a recapture or a terminal loss of capital cost allowance, and recapture is added to income. See CCA recapture.

Spreading or sheltering the gain

If part of the price is payable after the year of sale, the Act allows a reasonable reserve, so the gain is reported over a limited number of years. A gain on qualified small business corporation shares may also qualify for the capital gains deduction, claimed on line 25400 up to a lifetime limit that the CRA says is indexed. Because other taxes can interact with the deduction, ask for an after-tax projection.