Team Approach Planning

Is your Family Business Gaining from the Capital Gains Exemption?

Planning the future of your family business can be difficult. Will your children make wise decisions? Will the market be forgiving if they don’t? The questions are seemingly endless, but asking your life insurance advisor about pairing the benefits of the capital gains exemption with your life insurance policy is an easy one. Is it worthwhile? The answer will be, most likely, a resounding yes.

The capital gains exemption is exactly what it sounds like – an opportunity for individual taxpayers who own shares in qualifying small business corporations to be exempt from claiming all of their capital gains. As a result, they may be able to reduce their taxable income when they file their income tax.

While this opportunity is not one to be missed, a provision in the Income Tax Act sometimes makes it difficult to apply the capital gains exemption when transferring shares of a business to the next generation. It is the most ideal if the son or daughter of the current business owner is able to fund the purchase of the shares from their parents personally, instead of using a holding company.

It is possible, however, that the son or daughter who will be taking over the business may not be financially capable of funding the shares straight from their back pocket. This is where life insurance comes in. By using a life insurance policy as collateral for a loan, children are able to borrow in a tax effective manner to fund the purchase of their shares. They are able to secure their place in the family business while their parents are still able to make use of the capital gains exemption.

The capital gains exemption can be realized for those qualifying businesses and corporations which have 90% of their fair market assets used principally in an active business carried out primarily in Canada.

For a similar article, read What's In Your Capital Dividend Account.