Capital gains exemption crystallization

Crystallization is a planning step, not a sale: nothing is sold to an outside buyer. The CRA describes the deduction itself on its line 25400 page, while the mechanism that realizes the gain sits in other parts of the Income Tax Act. If an adviser proposes it, ask how it uses the lifetime capital gains exemption and why now.

How the election works

Under subsection 85(1), a taxpayer who disposes of eligible property to a taxable Canadian corporation for consideration that includes shares can elect jointly with the corporation, on CRA form T2057, an agreed amount. That amount is deemed to be the taxpayer’s proceeds and the corporation’s cost, subject to limits in the same subsection. Subsection 110.6(2.1) allows an individual (other than a trust) resident in Canada throughout the year to claim a deduction, up to limits it sets, where a share disposed of was a qualified small business corporation share at the time of disposition.

What to ask

• Whether the shares meet the definition of a qualified small business corporation share when they are disposed of
• Whether section 84.1 or the alternative minimum tax changes the result
• How the steps are documented and filed, including the joint election form
• Whether the plan was reviewed with this answer on crystallizing before a sale in mind