The Lifetime Capital Gains Exemption: Crystal Clear or Pure Confusion?
What is the “lifetime capital gains exemption” and how can you take… Learn More
Author(s):  Leo E.K. Palay,   Frank Lavitt,   , Celyna Yu
published 05/08/2023
What is the “lifetime capital gains exemption” and how can you take advantage of it?
The Lifetime Capital Gains Exemption (“LCGE”) allows every eligible individual to claim a deduction to their taxable income for capital gains realized on the disposition (or deemed disposition) of qualified small business corporation shares (“QSBCS”). In 2023, the exemption limit per individual on the disposal of QSBCS is $971,190, which, with proper planning, may result in a tax-free sale.
While the focus of this article will be on the disposition of QSBCS, the LCGE can also be utilized for the disposition of qualified farm or fishing property (“QFFP”). In 2023, the exemption limit per individual on the disposal of QFFP is $1,000,000.
In both situations, prior planning is crucial to take advantage of the LCGE.
Are your shares “qualified small business corporation shares”?
When determining if shares are QSBCS, three tests must be satisfied:
Since #2 and #3 require compliance for 24 months immediately before the determination time, several strategies can be utilized to ensure the LCGE can be taken advantage of when the opportunity for disposition arises.
Should you crystallize your “lifetime capital gains exemption”?
When the QSBCS meet the three tests above, an individual may want to consider “crystallizing” and triggering the capital gain through a corporate reorganization. Like the adage “a bird in the hand is worth two in the bush”, the main advantage of crystallizing is that the individual benefits from the LCGE rather than risk future changes that eliminate their ability to take advantage of it (including the risk of the elimination of the LCGE altogether).
Should you use purification strategies to take advantage of the “lifetime capital gains exemption”?
When the QSBCS do not meet the three tests above, an individual may want to consider “purifying” (which, colloquially means to move redundant cash and investments out of the corporation in order to make sure the shares remain QSBCS through tax planning). Simple strategies include disposing of non-qualifying assets or distributing non-qualifying assets as “dividends-in-kind”; however, the tax cost of these strategies should be weighed against the tax benefit of the LCGE.
More complex, but potential tax-deferred purification strategies, include:
There are various other criteria and consequences to consider when determining whether the lifetime capital gains exemption is right for you. It is recommended that you contact one of our TDS Tax Lawyers to advise how you can take advantage of the lifetime capital gains exemption and associated crystallization or purification strategies.
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