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Vancouver, BC (June 3, 2001):
You have worked hard to establish your small business,
you sell it and buy a new one.
Adrian Mastracci, fee-only investment
counsel and president of Vancouver based KCM
Wealth Management, comments, "Last year's
federal budget proposals permitting individuals
to rollover a capital gain on the sale of a small
business investment into the purchase of a new
small business may be a provision well worth exploring
in such cases."
"The deferral of a capital gain is only possible
when the proceeds of the first eligible small
business corporation are used to acquire a second,
or more than one, eligible business", notes Mastracci,
"Please note, however, that this provision has
nothing to do with the $500,000 capital gain exemption."
Mastracci's overview of the rules to defer the
capital gain is as follows:
- The form of investment in a new eligible business
is usually common shares issued from treasury
to you.
- The total value of the assets of the new business,
and related corporations, cannot exceed $50
million immediately after the new investment
is made.
- The new investment in the small business must
be held for at least six months from the time
of acquisition.
- There are other eligibility rules and criteria
governing the new purchase which must be made
within a specified time after the sale of the
first business.
- The deferral is available on capital gains
realized after October 18, 2000 to a maximum
$2 million of eligible small business investments.
You may reinvest more; however, the deferral
will be limited to the first $2 million of capital
gain arising from the business that was sold.
- The capital gain eligible for deferral is
used to reduce the tax cost of the new investment.
Mastracci provides the following as an illustration
of this provision:
- An individual sells an eligible business for
the sum of $500,000 today where the capital
gain on the sale is $300,000.
- The same individual acquires shares in a new
eligible small business in the amount of $700,000.
- Under the current income tax proposals, the
entire $300,000 capital gain could be eligible
for deferral provided that all of the criteria
are met.
"Let us not forget, however, that this provision
is merely a deferral of the tax on the capital
gain to a later date," says Mastracci, "One provision
that I explore with my clients is whether the
sale of the first business qualifies for part
or all of the $500,000 capital gain exemption."
"In the event that it passes all the tests,
then the client may utilize this provision before
the deferral," continues Mastracci, "This exemption
truly saves income tax now, but it requires that
the business qualify for at least two years."
Mastracci summarizes, "Selling an existing business
and purchasing a new one requires careful review
to take advantage of all the possible benefits
under the income tax act."
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