On July 2nd*, I published a response to a reader’s questions concerning tax free income in Canada. I received a follow-up question from the writer yesterday concerning the lifetime capital gains exemption (LCGE).
* This article was originally published in July of 2008.
Does the LCGE cover only farm properties and qualified shares in stock exchanges or can it be used for residential properties capital gains, shares traded in foreign exchanges, or all shares traded in the Canadian or US exchanges ?
What is the basic tax rate in Canada? Is it on sliding scale that moves up, or is it a flat rate?What is the tax rate for dividend income from overseas and the tax rate for interest income from overseas?Are these taxes paid at end of year, or are they paid on a monthly basis ?
Lifetime Capital gains Exemption
The lifetime capital gains exemption applies only to gains realized on the disposition of “Qualified Farm Property” and “Qualified Small Business Shares.” Any share that is traded on a stock exchange is therefore excluded from the LCGE.
I’ll forego an explanation of qualified farm property as it does not and deal directly with the definition of qualified small business corporation shares. In order to qualify as a small business corporation share, the following criteria must be met:
(1) The shares must be shares of a Canadian-controlled small business corporation which, at the time of the disposition of the shares, uses 90% of its assets either directly or indirectly in an active business carried on in Canada or as a holding company for such a corporation.
(2) The shares must be owned by the taxpayer or their spouse.
(3) The shares must not have been owned by anyone else other than the taxpayer in the 24 months prior to the disposition.
(4) Throughout the 24 month period, at least 50% of the assets of the corporation must have been used principally in an active business or to finance a connected active business.
In order to be a Canadian-controlled small business corporation, the company’s shareholders cannot be controlled by one or any combination of a publicly traded corporation or a non-resident.
The phrase “active business” means that the corporation cannot be a “specified investment business” or personal services corporation.
A “specified investment business” (SBI) is a business whose principal purpose is to derive income from property (interest, dividends, rents, and royalties). However, if such a business employs five or more employees it will not be classified as a SBI.
The key facts are that the corporation must do its business in Canada, be owned by a Canadian citizen and not be for the purpose to generate investment income that would normally be earned as an individual.
Personal Tax Rates In Canada
In terms of tax rates, the personal tax rates can be found in the 2007 Tax Tables at Tax Resource Canada.
The tax earned on dividends received from foreign corporations is simply added to your personal income and taxed accordingly. Dividends from Canadian corporations receive a favourable tax treatment in the form of a dividend tax credit. The amount that is included in income for dividends from large Canadian corporations is 1.45 times the actual amount of dividends received. The extra amount is called the dividend gross-up. These dividends are eligible for an enhanced dividend tax credit of 18.97% of the grossed up dividend.
Interest income regardless of what location in the world it was derived is considered straight income and added to your personal income for tax purposes.
Corporate taxes are a little different and are assessed on any corporation that is resident in Canada. A corporation is deemed a resident of Canada if its management and decision making is in Canada. If the corporation is a resident of Canada it’s rate of tax can be between 16% & 30% depending on it’s provincial location and it’s status as a CCPC.
When Taxes Are Due
For the average Canadian, personal income taxes are calculated and are determined on a calendar year basis. The taxes are reconciled and a tax return is filed (and any tax balance owing is due) April 30th of the following year. If you are self-employed or a commission sales personal your tax return is due in June but any taxes owing are still due April 30th.
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{ 19 comments }
Hi,
We bought a home in 1980. Some part of the house has always been rented. The house was sold in 2008. We are trying to calculate how much of the house is capital gains tax exempt for each rental year. Is there any period since 1980 when the whole house might have been capital gains tax exempt despite the fact that some part of it was rented?
Cheers John and Katherine Lawrence
If the whole property was purchased for the purposes of earning rental income, then the whole property would have been taxable property. There was a $100,000 general lifetime capital gains exemption that was eliminated in 1994. If you had not used the $100,000 capital gains exemption by 1994, you had the option to incur a “deemed disposition” and bump up your adjusted cost base to its 1994 value and take advantage of the $100,000 exemption. However, if you had not used the exemption in 1994, the time is long past to take advantage of the election.
If you occupied the property as your principal residence throughout the period and at no time claimed capital cost allowance, you need not claim a capital gain as you would be entitled to the principal residence exemption.
Hello,
If I have a company (incorporated) where the income come from selling options for premium, or in other cases the company may makes money from the difference between the price paid and price sold on index futures (not from interest on bonds or dividends). Typical holding period of an investment/option sale is ~20 business days.
Could it be considered active business income?
Or am I an Investment Holding Corporation?
Are those capital gains or revenues?
Thanks
@Yves
Your company appears to be earning passive income and may not qualify as a small business corporation and thus not eligible for the small business deduction. So it appears to be an investment corporation.
In addition, the nature of the business also appears that your earnings may be business income as opposed to capital gains and losses.
If you own a corporation, it is important to ensure you have a qualified small business corporation in order to take advantage of the capital gains exemption.
I have a follow up question to capital gains exemptions on rental property.
I bought a house in 2008 and sold it in 2010. It was rented in 2008 and 2009, and then became my principal residence in 2010. Am I exempted from capital gains for selling the house in 2010 after having lived in it for almost 6 months?
Thank you.
You don’t get the capital gains exemption discussed above. Take a read through
I bought an old farm about 5 years ago . But I haven’t done any farming on it, I might have to sell it. Is there any capital gain exemptions that I might be available ?
Hi Byron,
The capital gains exemption is probably not available because it was not used for farming. However, you may be able to use the principal residence exemption on all or part.
Give me a call at 905-339-9237 and we can discuss some options.
I have heard there is a lifetime exemption on capital gains of 500,000. Is this true.
Conversely I have heard capital gains are taxed at a rate of half of the amount you gained at your personal income tax rate.
I bought a house in June of 2011. I am thinking of selling at 100,000 capital gains.
It is my wife and I’s second home. How much tax will we have to pay?
Capital gains are taxable at half the rate and there is an exemption. The exemption does not apply to real property on the ale of qualified small business corporations shares.
Hello,
We are in the midst of planning a sell of our cottage rental business. We are hoping to sell the shares and supposed in doing so that we would qualify for the capital gains exemption. Someone suggested we may not qualify as we are a rental business. However, we do supply services as well. We do not sell food or provide housekeeping during a booked stay, but we always have a manager on site (lives on site for the season) to fix broken stoves, plumbing, electrical, septic, etc. We also have a shower building that we clean twice a week. We clean cottages between stays and provide pillows, mattress covers, dishes etc which we keep clean and replace. During power outages we provide emergency lighting and water.
So do we qualify as an active business?
thanks for your time,
Vickie
At the time of sale, 90% of the assets must be in an active business in Canada. The rental property would likely be ineligible assets unless the rental business could employ more than full-time full-time employees.
My husband and I bought a property in 1985 for $130,000.00. We are now
looking to sell it for 950,000.00. We used it as a rental property. How much
of an exemption are we entitled to. Also, how much capital gains do we pay?
Hi Judy,
The capital gain on the property would be the difference between the cost and proceeds of the sale. You should include any capital imporvemnets to the cost along with the original legal and brokerage fees. On the sale side, deduct legal and broker fees.
Only half of the gain is taxable. However, there is generally no exemption on rental property businesses.
Is it best to put our money from a sale of a rental property into a corporation
of just invest it in a personal way. If the money is in the corporation, do we
pay less taxes or more
The corporate tax rate on investment income is generally high and may not make sense.
Do sale of shares held personally in a “Mini-Storage Company” in which the prime source of revenue is rental income from storage of personal property in secure locked units qualify for CGE. We have no employees and my partner and I manage the business.
Tks
Difficult to say without knowing all of the facts of the company and it’s shareholders.
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