QUALIFIED SMALL BUSINESS SHARE

Qualified Small Business Share

Task 1

Introduction

The lifetime Capital Gains Exemption (CGE) provides small-business owners with an opportunity to save income tax on up to $375,000 of taxable gains recognized on the disposition of qualified shares of their small business. With an increasing number of professionals in Canada People are incorporating their businesses due to legislative changes and baby boomers thinking about retirement and succession planning for their small businesses, there are now an increased number of people in Canada who may qualify for a reduction in tax payable on the disposition of their businesses.

QSBS

QSBS Defined. To qualify as QSBS which is also known as Canadian-Controlled Private Corporation, share must be:

a)It should be issued by a C corporation with no more than $50 million of gross assets when issued;

b)Issued by a company using at least 80% of its assets by value in an active trade or business (excluding personal services, finance, farming, restaurants, hotels, etc);

c)Issued after August 10, 1993;

d)Held by a non-corporate taxpayer; and

e)Acquired by the taxpayer on original issuance.

There are many niceties to be observed. For example, detailed rules cover redemptions of stock. After all, there's a natural tendency for taxpayers to want to turn in their existing stock, so they can get newly minted “tax-free” stock thereafter.

To combat this, if you or a related person had stock redeemed by the same company within two years before you buy your new stock, you do not qualify. A stock redemption is simply a sale of stock to the company itself. The same rule applies for two years after you acquire your stock. That totals four years spanning the time of your investment when a company stock repurchase from you or related persons will disqualify you from tax-free treatment. For details, see Beware Redemptions in Year-End Stock Investments.

Asset Test

A QSB corporation's aggregate gross assets cannot exceed $50 million either before the issuance of the stock or immediately thereafter. Immediately after the issue date, the $50 million cap must take into account any amounts received for the stock on its issuance. If at any time before the issuance, but on or after Aug. 10, 1993, the corporation or any predecessor held gross assets exceeding $50 million, the stock will not qualify (Mathison, 2010).

Gross assets for purposes of the $50 million cap include cash plus the aggregate adjusted bases of all other corporate property. Adjusted basis for this purpose is determined as if the basis immediately after the contribution were equal to the property's fair market value on the contribution date. Although qualification of issued stock is not dependent upon keeping under the $50 million asset ceiling subsequent to its issuance, the test will disqualify any subsequently issued stock once the $50 million ceiling is reached. For businesses close to the $50 million mark looking to issue further qualified stock, managing cash flow and expenses should become a priority. This might especially be the case in certain research and development operations that realize significantly greater expenses than income over an extended ...