Lifetime capital gains exemption on small business shares vs farm or fishing property

CRA says the capital gains deduction, which it ties to the lifetime capital gains exemption, applies to dispositions of qualified small business corporation shares and qualified farm or fishing property. The same deduction is claimed on line 25400 after completing Form T657, whichever class is sold. What differs is the test the property must pass. This page compares the two classes and does not repeat how to claim the deduction, which this guide on claiming it covers.

Qualified small business corporation shares

Under section 110.6(1) of the Income Tax Act, the test is applied to a share of a corporation. At the determination time the share must be of a small business corporation owned by the individual, the individual’s spouse or common-law partner, or a related partnership. Throughout the preceding 24 months it must not have been owned by anyone other than the individual or a related person or partnership. During the part of those 24 months it was owned, it must have been a share of a Canadian-controlled private corporation meeting an asset test tied to assets used principally in an active business carried on primarily in Canada, or to shares or debt of connected corporations. The definition tightens that test to “all or substantially all” in certain holding-company chains.

Qualified farm or fishing property

This class is a wider list of property. CRA says it includes real property such as land, buildings and fishing vessels, and property in capital cost allowance Class 14.1, such as milk and egg quotas or fishing licences. Under section 110.6(1), it covers real or immovable property or a fishing vessel used in a farming or fishing business in Canada by listed users, a share of a family farm or fishing corporation, an interest in a family farm or fishing partnership, and Class 14.1 property used by those users. Section 110.6(1.3) adds conditions before real property counts as used in the business, including ownership by the individual or close family throughout at least 24 months. A family farm or fishing corporation share has its own test, tied to property used principally in a farming or fishing business in which the individual or a spouse, child or parent was actively engaged on a regular and continuous basis.

Where the two differ

• What is sold: shares of a corporation for the first class; land, buildings, vessels, shares or partnership interests for the second
• The central test: the corporation’s character and the 24-month ownership history for shares; use in a farming or fishing business by the owner or close family, plus the section 110.6(1.3) conditions, for farm and fishing property
• Reporting: CRA’s T4037 has the shares reported on line 1 of Part 3 and qualified farm or fishing property generally on line 2

The two classes share some features. CRA says a trust can allocate and designate taxable capital gains from a disposition of either class to its beneficiaries. It also provides a nine-year reserve period, so the gain is included in income over 10 years, for transfers to a child of family farm or fishing property and of qualified small business corporation shares. CRA’s page points to Form T2017 for how the maximum reserve is calculated. Separately, sections 73(3) and (3.1) set transfer rules for land or depreciable property in Canada used principally in a farming or fishing business and transferred to a child resident in Canada, and sections 73(4) and (4.1) do the same for shares of a family farm or fishing corporation and interests in a family farm or fishing partnership. Neither names qualified small business corporation shares.

Which fits depends on the facts

• If the asset is a corporation’s shares, then the Canadian-controlled private corporation, asset and 24-month ownership tests apply, or the family farm or fishing corporation test if it is a farm corporation
• If the asset is land, buildings or a vessel, then who owned it and for how long, who used it in the farming or fishing business, and whether they were actively engaged are the questions section 110.6(1.3) asks
• If the successor is the owner’s child, then the reserve and rollover provisions differ by class and carry conditions
• If a trust holds the property, then gains it allocates and designates to beneficiaries are on CRA’s list of eligible gains, and each beneficiary still has to meet CRA’s conditions, including residence and an available deduction limit
• If part of the lifetime limit may already have been used, then confirm how much remains before relying on a sale price

Which class a particular holding falls into depends on its history and structure, so an accountant should review it before a sale.