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By Adrian Mastracci
North Shore News
Business Section, "Loose Change"
Sunday, June 10, 2001
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.
However, 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.
Please note that this provision has nothing to
do with the $500,000 capital gain exemption.
A brief overview of the rules to achieve a deferral
of 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.
An illustration of this provision is an individual
who 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.
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. This exemption truly saves income tax
now, but it requires that the business qualify
for at least two years.
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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