Capital Gains Tax (CGT) is a tax you pay when you dispose of an asset for a greater amount than the cost of the asset.  This profit component is the “capital gain” and is added to taxable income.  

The Tax Act provides for four areas of CGT relief to small business, including farms.  A small business is one where the net value of CGT assets owned by the taxpayer, and affiliates and entities connected with the taxpayer are less than $6 million.  

1. Fifteen Year Exemption

A taxpayer can disregard a capital gain arising from the disposal of a CGT asset where that asset has been continuously held for 15 years, the taxpayer is at least 55 years of age, and the CGT event happens in connection with the retirement of the taxpayer, or the taxpayer is permanently incapacitated at the time.

2. 50 Per cent Active Asset Exemption

Under this exemption, the amount of CGT that a small business taxpayer is required to pay on the disposal of an active asset is reduced by 50 per cent.  This effectively means that a CGT liability will only arise in respect to 25 per cent of the capital gain derived under the disposal of small business assets.

3. Retirement Exemption

The retirement exemption gives a taxpayer the choice to disregard all or part of a capital gain in relation to a CGT asset of the taxpayer’s small business, if the capital proceeds from the CGT event are used in connection with the taxpayer’s retirement.  There is a lifetime limit of $500,000 for all choices that can be made in respect to an individual under this exemption.  The taxpayer (where an individual) must be 55 years of age or older at the time they receive the capital proceeds from the sale of a small business.  

4. Deferment of Capital Gains Tax by Rollover Relief

This exemption allows a small business taxpayer to defer or rollover all or part of a capital gain from a CGT event, in relation to an asset of a small business, if replacement assets are acquired.  The rollover only applies in respect to the residual capital gain left after the 50 per cent small business exemption is applied.  

We can assist if you require advice with respect to tax issues relating to estate planning and/or succession planning.