Crystallizing your capital gains In chemistry, good crystallizations begin with the process of nucleation. In tax, bad crystallizations end with taxpayers 'getting nuked' by the tax authorities. The 2007 federal budget proposed increasing the lifetime capital gains exemption (LCGE) to $750,000 from $500,000; this proposed increase applies to capital gains realized on the disposition of qualified small business corporation (QSBC) shares on or after Mar. 19, 2007. Intending to take immediate advantage of the proposal, some business owners rushed to crystallize their capital gains on the disposition of shares of their corporations. That is, they increased the cost base of their shares by triggering a capital gain at a time when the corporation qualified for QSBC status. The perceived benefits from immediately crystallizing were clear: individuals who have yet to use any of the LCGE would shelter a total of $375,000 worth of taxable capital gains, and those who have used up the existing exemption would have an additional $125,000 available. This assumed, of course, that the proposed LCGE increase would be included in the soon-to-be-passed budget bill. Except it wasn't. While we anticipate the proposed LCGE increase will be included in a subsequent budget bill as early as this fall, the current applicable exemption limit remains at $500,000. Nonetheless, this delay doesn't reduce the need to consider crystallizing as a tax-planning opportunity, since afterwards, a corporation's ability to meet the QSBC definition is irrelevant when its shares are sold in the future. While those who have not yet used any of the LCGE still stand to benefit from immediately sheltering $250,000 worth of taxable capital gains by crystallizing now, they may need to go through the process yet again to use the proposed additional $125,000 shelter. We recommend holding off from crystallizing until the new LCGE legislation is passed — unless there are extraordinary timing issues in meeting the QSBC definition that necessitate crystallizing before the new legislation is in place. Those who have used up the existing exemption may also eventually enjoy the extra $125,000 shelter, but they must be prudent not to trigger any immediate capital gains, as those gains will continue to be subject to income tax until the new LCGE legislation is passed. A timely crystallization is an important part of any QSBC shareholder's tax plan. Charles is a Canadian Tax Manager. He can be reached at (416) 644-4466 or by e-mail at charles_fu@mintzca.com. Mintz & Partners | 1 Concorde Gate, Suite 200, North York, Ont., M3C 4G4 | www.mintzca.com Phone: (416) 391-2900 | Fax: (416) 391-2748 | E-mail: info@mintzca.com Tax Alert is an e-newsletter written by the Tax Team of Mintz & Partners LLP. Please go to http://www.mintzca.com/index.php?section=taxdirectory to learn more about our Tax Team. The issues raised are for information purposes only. Readers are urged to contact their professional advisors before acting on the basis of the material contained herein. |