SOME STEPS TO CONSIDER NOW, IF THE RULES COME IN AS PROPOSED.

The government is also concerned that the LCGE is being multiplied within related groups, often by having a family trust be a shareholder, allowing more than one individual to claim the LCGE to reduce the taxable capital gain realized on the sale of private corporation shares. Effective for dispositions after 2017, three measures were proposed to prevent this from occurring. First, the LCGE would not be available for gains, either realized or accruing, before an individual is 18 years old. Second, if a capital gain is subject to the new tax on split income rules discussed above, then it is not eligible for the LCGE. And finally, except for certain exceptions, beneficiaries of trusts would no longer be able to claim the LCGE.

Transitional rules, however, have been proposed to permit some shareholders to elect to “crystallize” a capital gain in 2018 so that they can still claim the LCGE. Crystallization is the act of recognizing a capital gain (or loss) for tax purposes which doesn’t necessarily involve an actual sale to a third-party.

If you are planning to file the election to crystallize the LCGE in 2018, more than 50 per cent of the assets within your corporation must be used in an active business for at least one year prior to the election. As a result, consider whether any steps need to be taken before Dec. 31, 2017 to reduce the non-active assets in your corporation so that this test is met at some point in 2018 if you plan to make the election. For instance, non-active assets can be used to pay down debt or a bonus could be paid to the active shareholder(s) out of non-active assets.

In addition, if you are planning to make the election to claim the LCGE, consider whether a valuation of the corporation will be necessary so that the LCGE can be claimed on the deemed capital gain arising on all or a part of the increase in value of the shares. Substantial penalties could apply if an inaccurate fair market value is used for the election.