In 1986, the CRA announced the introduction of Lifetime Capital Gains Exemptions. By learning how it works and how to qualify for it, you can save a significant amount of money in taxes. Tax Accountant Toronto team will look at CGE in detail.
Tax Accountant Toronto team state that if you buy a capital asset for your firm and then sell it at a price that is significantly higher than the purchase price, you must pay capital gains tax on the profit you make.
The LCGE, on the other hand, is a tax exemption that allows you to avoid paying capital gains tax up to $800,000 in total gains. However, not all assets are eligible for the capital gains exemption.
This tax exemption is available only to qualified small business corporations or certain types of real estate that are eligible for the previous agricultural property, fishing property, and stock investments. This tax exemption was created to encourage individuals to invest in more productive assets.
Tax Accountant Toronto experts state that when you sell an item for a profit, the CRA wants you to pay taxes on half of the gain. However, if the asset you sold qualifies for LCGE, you can claim a $800,000 exemption on the taxable amount.
For example, if you sell an asset that qualifies for the LCGE and make $1 million in profits, the CRA allows you to pay tax on half of the profits ($500,000).
The CRA has established special regulations to guarantee that the asset qualifies for this tax break. Small businesses that are eligible to utilize this tax exemption must be Canadian-controlled private corporations.
You must also be a resident of Canada for the whole year if you are an LCGE applicant. Individuals only, so no residency requirement. It’s also true that since LCGE is focused on individuals, you must be a resident of Canada throughout the tax year. Tax Accountant Toronto team recommend you to Keep in mind that any net investment losses accumulated during the course of the year can reduce the taxable gain.
The greatest feature of the LCGE is that the savings are spread out over the life of the investment, resulting in significant tax savings over time. Also keep in mind that an asset must be utilized in a functioning business primarily based in Canada to qualify for this tax exemption.
There are assets such as goodwill and patents that do not appear on a company’s balance sheet; however, the CRA will allow you to include goodwill and patents as assets.
The CRA must determine if the disposed share was owned by the shareholder or a related person for at least 24 months before the disposal. The tax authorities have set this restriction aside to prevent flipping investments and ensure that only long-term assets are eligible for the exemption.
The commonly used CGE strategies of moving capital gains into a trust and distributing it to different family members are no longer effective. Capital gains that are earned by individuals under the age of 18 are no longer eligible for CGE.
These laws were implemented by the federal government to prevent business owners from reducing their tax burden by income splitting with their relatives.