What was once a sprint gives way to a jog, and eventually a shuffle. How we manage our end game is crucial.
The World's Fastest Man:
About seventeen years ago, two very successful, (but loudmouthed) sprinters ran a race to determine which was the world's fastest man. Canada's Donovan Bailey and his American foe, Michael Johnson, had each been consistent victors in their respective specialties, the one-hundred and two-hundred metre sprints. When Johnson began touting himself as the "World's Fastest Man," Bailey, and the Canadian media got irked, and eventually a one-hundred and fifty metre race was set to determine who was truly faster. Each racer received a $500,000 appearance fee, with the winner taking away an extra $1,000,000.
Media hype was significant world-wide. The contest of fleet-footed men was only outdone by the caustic war of words spewed forth by their respective country's media outlets and by the men themselves.
Race Day. June 1, 1997, Toronto Skydome:
Bailey, who specialized in the shorter distance, was expected to take the early lead. Johnson, who was more adept at the longer race, was supposed to be stronger in the final few metres. Chest thumping and hand-wringing were in full flight leading up to the race. Bailey complained that the curve in the track favoured Johnson, who continued to insist that he be introduced as "the world's fastest man."
In the end, the actual race was a disappointment, especially for Johnson who pulled up with an apparent injury at the one hundred and ten metre mark. At the time Johnson was well behind Bailey, which fueled yet another obnoxious outburst.
Johnson later admitted to using performance-enhancing drugs during his career, and endured the humiliation of being obliged to return some of his gold medals.
The End Game:
Like Johnson, you may have worked long and hard to get where you are now, but managing the end-game is crucial to how you will be remembered -- and how you will be taxed.
What have you gained if you have to give so much back?
For example, if you're thinking about selling the corporation shares of your family business, and you manage it effectively, your share sale could qualify for a tax exemption on up to $750,000 of the capital gain realized on the sale of Qualifying Small Business Corporation (QSBC) shares. Depending on your marginal tax rate, the $750,000 exemption could translate into a potential tax savings of as much as $171,750, based on BC's top marginal personal tax rate of 45.8%.
When can you use this capital gains exemption?
Aside from a simple share sale, a few other examples of when you may be able to use the $750,000 capital gains exemption are:
An estate freeze of a family business, which allows you to transfer the future growth of a company to other shareholders;
A direct transfer of family business shares to other family members;
A private Canadian company being taken over (by way of share purchase) or merging with another Canadian or foreign company;
A deemed disposition of private shares on death.
Criteria to qualify for the exemption
Although the definition of QSBC shares is quite complex and professional advice must be obtained, the general criteria to qualify for the exemption are as follows:
The shares must be of a Canadian-controlled private corporation;
The shares must be owned by the taxpayer, their spouse or a partnership related to the taxpayer at the time of the sale; and the shares must have been held for at least 24 months before their sale by the taxpayer or related person;
At least 90% of the assets must have been used to carry on an active business in Canada at the time of disposition; and
More than 50% of the assets must have been used in an active business throughout the 24-month holding period.
As you can surmise, planning for the sale should commence well beforehand to help ensure you "purify" the company to help it qualify for this very important tax exemption. A little careful planning a couple of years before you intend to sell can go a long way toward improving the final outcome of that which you have worked so hard to build for the past several decades.
Past exemptions may impact your current situation
Today, the available $750,000 exemption must be reduced by any previous capital gain exemptions you may have used. Other details and limitations are beyond the scope of this article. Contact your tax advisor to determine if you qualify for this exemption; and if so, how much.
This article does not constitute individualized tax or legal advice. Readers should consult their own lawyer, accountant or other professional advisor when planning to implement a strategy.
Mark Ryan is an advisor with RBC Wealth Management, Dominion Securities (member CIPF) and can be reached at [email protected].
