Earn 750000 tax-free! - A capital gains exemption allowed by CRA

If you sell shares of SMALL CANADIAN CORPORATION, you may be able to take advantage of 750,000 capital gains exemption!

Section 110.6 of the Income Tax Act (ITA) allows 750,000 tax-free capital gains to individuals. This exemption is valid for the gain on sale of shares of small business i.e. "qualified small business corporation share", as defined by ITA S.110.6(1) to be considered as such, the business has to meet several criteria:

" means a share of the capital stock of a corporation that,

(a) at the determination time, is a share of the capital stock of a small business corporation owned by the individual, the individual's spouse or common-law partner or a partnership related to the individual,

(b) throughout the 24 months immediately preceding the determination time, was not owned by anyone other than the individual or a person or partnership related to the individual, and

(c) throughout that part of the 24 months immediately preceding the determination time while it was owned by the individual or a person or partnership related to the individual, was a share of the capital stock of a Canadian-controlled private corporation more than 50% of the fair market value of the assets of which was attributable to

(i) assets used principally in an active business carried on primarily in Canada by the corporation or by a corporation related to it"

Example:

Mr. Holder owns 30% of shares of Holding Corp. The shares were acquired two years ago for 500,000. Holding Corp. is a Canadian-controlled private corporation that uses its assets in active business done in Canada. This year Mr. Holder sells his shares to Mr. Rich for 1,150,000. Thereby, Mr. Holder will receive a taxable capital gain from sale of his shares in the amount of 650,000. Upon satisfying all criteria for Capital Gains Deduction, the gain of 650,000 will not be taxable. Mr. Holder will also be able to use the remaining 100,000, left from previously available 750,000 to use in future years.

There are several provisions in the Act that leave CRA some freedom of discretion to prevent abuse of the provision by aggressive tax planning. Sections 110.6(7) and 110.6(8)deal with corporation's cost manipulation issue, the second, however, might present an issue to the honest taxpayer as well, by the way it disqualifies the companies that did not distribute dividends in the amounts comparable with their earnings in the past years.

A petty arises when the business is sold and the buyer leans more towards making asset transfer instead of transferring ownership of the Corporation. The buyers are often advised by their lawyers that buying the assets of the business alone safeguards them from any problems from the corporation's past, such as audits, creditor's or customer's claims. In that case the corporation stays with the owner, and the advantage of the capital gains exemption is foregone.

The way to satisfy both buyer and seller in that case may be that the owner sells the corporation to third party and takes advantage of available 750,000 capital gains exemption, and later the third party sells the assets of the business to the intended buyer. The third party retains the corporation.

As the matter is complicated it is highly desirable to obtain professional advice and business deal planning ahead of time. Here, the authors only aimed to grasp the general idea.

Important notice: The information above may reflect a subjective interpretation by the author(s), who, by no means may accept any responsibility or liability whatsoever for the results of proper or improper use of the above information, whole or in part, it as well is explicitly stated that whatever information provided by authors, may not suit specific purpose of specific reader, and it alone may not be relied upon to produce decision. In each individual case professional advice must be obtained.

Obtain Business Capital Using A Variety Of Commercial Finance Options

Commercial finance is one of the many options available to entrepreneurs seeking capital to start or grow an existing business. This sort of financing is also referred to as asset-based lending, meaning that it is a secured business loan. The borrower guarantees the loan by giving up business assets as collateral for the loan. Another popular phrase for commercial finance is asset-based finance.

Account receivable factoring is one form of commercial finance. This consists of selling open invoices for cash that can be used right away in the business. There are many benefits to this financing option including not giving up equity, being able to take advantage of early payment and volume discounts from your suppliers, you can actually purchase in greater volume from suppliers, and you also accrue no additional debt in your business.

Another popular commercial finance option is purchase order financing because it offers quick cash flow reserves. When any business is growing or expanding their business the cash flow simply isn't there because of the money it takes to market and produce products. Suppliers also want to be paid with C.O.D. and your customers are on Net-30 terms; so you run into a cash flow problem. Purchase order financing solves this issue by paying for the costs of your goods directly to the supplier, thus giving you more cash to use on more critical business expenditures. To begin with purchase order financing simply obtain a purchase order from your customer, find an approved supplier, place the order through that supplier.

Asset based loans, an additional commercial finance option, provide a short term approach to maximizing cash flow within a business. This form of financing is used as test for a business to show how they would perform with a long term loan. The business who is receiving the asset based loan has a short window to prove that with the proper financing their business model is effective, and that a long term loan would ensure business growth over a long period of time. This form of financing is perfect for the business that can't afford to wait to establish their business credit. The assets that are accepted as collateral for this type of loan include real property, accounts receivables, and completed inventory.

Other forms of commercial finance include bankruptcy reorganization, expansion financing, import and export financing, inventory loans, secured lines of credit, and merchant account advances. Financing a business is a difficult process, but if you utilize the financing resources available, your business have a much greater chance of success.

It is also good to work on establishing your business credit, ensuring that you separate your personal credit from your business credit. With good business credit scores obtaining large loans and other forms of capital is very simple, and you won't be one of the 97 percent that actually have a loan application denied. One other strategy that is easy to do and beneficial on your quest for business capital is to use a free business capital search engine.