My name is Mark Goodfield. Welcome to The Blunt Bean Counter ™, a blog that shares my thoughts on income taxes, finance and the psychology of money. I am a tax partner and the managing partner of Cunningham LLP in Toronto. This blog is meant for everyone, but in particular for high net worth individuals and owners of private corporations. The views and opinions expressed in this blog do not reflect the position of Cunningham LLP. My posts are blunt, opinionated and even have a twist of humor/sarcasm. You've been warned.

Monday, October 27, 2014

Crowdfunding – What is it? Are there Income Tax Implications?

Over the past couple years, crowdfunding has become a popular way to raise money online. As I only have a passing understanding of this concept, I have done a little research to enhance my own knowledge and for those of you not familiar with crowdfunding, provide a bit of a primer.

What is Crowdfunding?

 

According to the National Crowdfunding Association of Canada, crowdfunding is “the raising of funds through the collection of small contributions from the general public (known as the crowd) using the Internet and social media. … The key to crowdfunding in the present context is its inextricable link to online social networking and its ability to harness the power of online communities in order to extend a project’s promotion and financing opportunities. ...More recently, crowdfunding is becoming an increasingly common form of raising funds in the technology and media industries; including music, film and video games.”.

The top ten business crowdfunding campaigns as of April, 2014 are listed in this Forbes article.

Crowdfunding Models


There are four major crowdfunding models; however, there are multiple variations of these models.

(1) Donation Model – Crowdfunding is used to support a social cause or a charity by raising donations. These contributions are typically altruistic in nature and typically, official income tax receipts are not issued.

(2) Reward Model – Supporters receive non-financial rewards such as discounts on the product and early access to the product or service.

(3) Lending – Investors make interest bearing loans to the start-up.

(4) Equity – Investors obtain an equity stake in the company, similar to investing in any public company, although there may be ownership restrictions.

Regulatory


The regulatory system in Canada is a little all over the place for each province. In March 2014, the Ontario Securities Commission, the largest regulator in Canada, published four new prospectus exemptions including a crowdfunding exemption. The OSC provided a 90-day public comment period (ended June 18, 2014). These exemptions are intended to facilitate the raising of capital by businesses at different stages in their development, while maintaining an appropriate level of investor protection.

Canadian Lawyer Magazine  summarizes these exemptions for crowdfunding as follows:

1. Only Canadian reporting issuers and non-reporting issuers that are not investment funds, real estate issuers, or blind pools may access the crowdfunding exemption.

2. Issuers will be permitted to raise only up to $1.5 million total in any 12-month period. There is no limit to how often an issuer utilizes the crowdfunding exemption in any 12-month period, provided the issuer does not exceed the aggregate limit.

3. Issuers may only offer prescribed securities — for example, common shares or preference shares that are relatively simple.

Consistent with the policy of minimizing risk; investors will not be permitted to invest more than $2,500 per offering and more than $10,000 total in a calendar year.

Income Tax

 

The CRA has stated in a technical interpretation  (2013-0484941E 5) that funds received from crowdfunding campaigns are generally taxable as business income. The amounts taxable would generally be where the contributor receives a product or promotional item. Where equity or debt is issued in exchange for funding, those amounts will not be taxable.

The interpretation dealt with raising funds for a musical recording, where the contributors would receive a free recording or promotional item, but would not receive any equity or be entitled to a share of the profits from the venture.

The CRA went on to state that whether certain expenses are deductible is a question of fact. “Expenses related to crowdfunding efforts incurred by a taxpayer for the purpose of gaining or producing income from a business within the meaning of paragraph 18(1)(a) of the Act may be deductible. It is our view that the cost to a business to provide donor gifts (ex. cost of T-shirts) and fees paid to undertake crowdfunding activities may be deductible if the requirements of the Act are otherwise met.”.

Crowdfunding is an ever-evolving area, with regulatory and tax authorities constantly trying to keep up. If you intend to raise funds via crowdfunding, it is essential you obtain regulatory and tax advice before you start; hopefully from a professional if you can afford it, or at minimum from an organization such as the National Crowdfunding Association of Canada which may be able to provide some direction if not advice.

The blogs posted on The Blunt Bean Counter provide information of a general nature. These posts should not be considered specific advice; as each reader's personal financial situation is unique and fact specific. Please contact a professional advisor prior to implementing or acting upon any of the information contained in one of the blogs.

Monday, October 20, 2014

In Ontario, You Are Rich If You Make $220,000!

I think most people would agree, that those of us who make the most money ("the rich") should be taxed at higher marginal tax rates. However, what we may not all agree upon is what level of salary/income makes you “rich” and what the highest marginal tax rates should be. In Ontario, where supposedly only 2% of income earners make more than $150,000, “sort of rich” now starts at $150,000 and you are considered rich at $220,000.

I guess it is all a matter of perspective (my accounting/tax practice and blog is/are directed at high net worth people and small business owners so my living depends on the “rich”) but to me, if you make $200,000 or even $300,000, you are doing extremely well, but are far from being wealthy or rich, especially if you live in Toronto.

A few weeks ago I was undertaking some dividend tax planning for a family that has various family members scattered across Canada. When I compared the taxes that were payable by the child in Alberta and the child in Ontario, I thought I had made an error in calculation. There was a massive tax payable variance on this dividend.

That Alberta and Ontario have a significant taxation gap is not new news. What caught me off guard, and I think will catch several Ontarians off guard at tax time this year, is the impact of the new marginal tax rate threshold in Ontario. In 2013, Ontario taxed incomes over $509,001 at the highest marginal rate. For 2014, the $514,090 threshold in Ontario was dropped to $220,000, and a second level of higher tax rates was introduced for those with income between $150,000 and $220,000.

The excellent website Taxtips.ca, reflects that the highest combined marginal rate for an Alberta taxpayer on a non-eligible dividend paid by the typical small business is 29.36%. In Ontario, that rate for someone who makes over $220,000 is 40.13%. If a small business pays a $200,000 dividend to a high marginal rate child living in Alberta, he/she will owe approximately $59,000 in tax on that dividend; while that same dividend will be taxed to the other child in Ontario at approximately $80,000.

For your information, the highest marginal rate on employment and interest income in Alberta is 39% versus 49.53% in Ontario. Although it should be noted that Alberta considers you rich at $136,270.

The point of this post was twofold. Firstly, to warn those of you who earn more than $150,000 in Ontario, that you may owe substantially more income tax next April; especially if you have self-employment, rental income, or other investments (not subject to tax withholding) and secondly, to note the huge taxation discrepancy between Alberta and Ontario. I expect there are going to be many Ontario accountants dealing with angry nouveau riche clients next April.

The blogs posted on The Blunt Bean Counter provide information of a general nature. These posts should not be considered specific advice; as each reader's personal financial situation is unique and fact specific. Please contact a professional advisor prior to implementing or acting upon any of the information contained in one of the blogs.

Monday, October 13, 2014

The Emotional Side of Retirement for Entrepreneurs

Last week, I featured a guest blog by Betty Hansen of Crossroads Planning Group Inc. on the emotional side of retirement. That post titled Retirement or Refirement can be found here as a complement to my six-part series titled How Much Money do I Need to Retire? Heck if I Know or Anyone Else Does! 

Today, Betty returns with another great post on the emotional side of retirement for entrepreneurs. As someone who has dealt with owner-managers of companies for years, I know they are often wired a little different and thus, retirement can seem like they have put their life into slow motion. I thank Betty for her excellent blogs and without further ado, here is her post.

The Emotional Side of Retirement for Entrepreneurs

By Betty Hansen


We all know what has to be done when it comes to our finances for retirement…investing, saving and years of planning. But many entrepreneurs have not thought about how they will emotionally handle this new stage in their lives.

Many definitions of retirement are similar to “the act of ending your working or professional career”. Sounds exciting, doesn’t it?

In my experience one group that generally does not transition gracefully through the act of ending their working or professional careers are entrepreneurs. The following quote from “You Can’t Fire Me I’m Your Father” by Neil N. Koenig sums up the reason why very well!

“Work is fun; it is seductively engrossing and exhilarating when it provides challenge, risk and reward.” This is what entrepreneurs live for and it certainly has a lot more appeal than a traditional definition of retirement.

I would love to be able to create a word to replace “retirement”… for many people that’s one of the biggest hang-ups. There’s an implication that you no longer are as useful to your business as you have been in the past. The roles may change. However, the importance of the knowledge, skills and experience that the entrepreneur can continue to bring to the business can be invaluable. When and how does retirement occur? I think there is no definitive answer to that question (or should there be).

Entrepreneurs quite often are stubborn, independent, confident and resilient. These characteristics work well while building up the business but often work against the entrepreneur when the time comes to pass on, sell or retire from the business. These characteristics cannot be turned off like a switch.

Let’s explore a few emotionally driven areas related to retirement for entrepreneurs.

Control, Identity and Purpose

 

Understanding how and when to give up control depends a lot on why one wants to keep control in the first place.

Wanting to keep control may arise because the entrepreneur feels no one can replace the skills they bring to the table. It can also arise from the fear that the next owner will do better.

There is also control for control’s sake. That usually happens when recognizing mortality and keeping control of the business is often one of the ways of putting that recognition out of mind.

Then there is control that’s kept because there is nothing else to replace it.

For the entrepreneur, the business may have been the focus of their purpose for decades and that has become their identity. That purpose and resulting identity has been imbedded in structure. However once the entrepreneur retires they may be faced with a future with no structure, no purpose and no identity and that can be daunting.

During the first few months of retirement there are usually lots of activities to be undertaken…then reality sets in. That reality may take the form of disenchantment and/or depression. A feeling of “so this is it?”.

A recently retired entrepreneur expressed these feelings. “When you have a business and become depressed you still have to deal with the business so you get up and deal with the business and the depression…when you are retired and become depressed there may not be anything out there to motivate you to get out of the depression”. That’s a depressing thought in itself.

I feel that the entrepreneurs who have a healthy and happy transition into retirement (or into new careers) are those that have started the planning process early and have created a culture of communication with their families and employees in order to create a future for themselves. One of the questions to be asked is “When not thinking about the business what am I doing when I lose all track of time?”

The answer to the above question may be the foundation on which to build the future. The business which has been an outlet for the entrepreneur’s control, purpose and identity needs to be replaced by something that will provide a similar outlet and create a vital and vibrant future.

At some point in time the entrepreneur will dispose of their business. The disposition may be voluntary or involuntary and may be to a third party or to family, but it is going to go. Let’s redefine the future before, during and after the disposition. That future may or may not include continuing participation in the business.

When a young man asked his 80 year old grandfather what he would change about his entrepreneurial career if he had to do it over, the grandfather indicated that he would have developed interests outside the business early on in his career that would give him greater purpose now.

Because we are living longer and better than generations in the past, I like to look at retirement not as an event but as a process that evolves over a period of time and a process that is just as important as succession planning or preparing the business for sale.

And that period of time will be different for each entrepreneur, their families and their business.

Betty’s company, Crossroads Planning Group Inc., helps familes transition their business from one generation to the next while encouraging family harmony. Betty believes that communication is the foundation of effective retirement, succession and estate planning. Please feel free to contact her directly at 519.269.9634 or by email at bhansen@crossroadsplanning.com. More information is available on Betty’s company website, www.crossroadsplanning.com.

The blogs posted on The Blunt Bean Counter provide information of a general nature. These posts should not be considered specific advice; as each reader's personal financial situation is unique and fact specific. Please contact a professional advisor prior to implementing or acting upon any of the information contained in one of the blogs.

Wednesday, October 8, 2014

The $800,000 Capital Gains Exemption

A couple of weeks ago I wrote a blog post on how the $800,000 Capital Gains Exemption ("CGE") Isn't a Gimme for Corporate Small Business Owners and how many private small business owners incorrectly assume they will automatically be entitled to the CGE should they sell the shares of their corporation.

Last week I was interviewed on the contents of the aforementioned blog by Promod Sharma for his Tea at Taxevity series. Promod, is an actuary by trade and insurance advisor. He is also the writer behind the blog Riscario Insider. The interview can be found  here. If you own shares in a Canadian non-public corporation, you should probably watch this interview.




The blogs posted on The Blunt Bean Counter provide information of a general nature. These posts should not be considered specific advice; as each reader's personal financial situation is unique and fact specific. Please contact a professional advisor prior to implementing or acting upon any of the information contained in one of the blogs.

Monday, October 6, 2014

Retirement or Refirement?

In February, I wrote a six-part series titled "How Much Money do I Need to Retire? Heck if I Know or Anyone Else Does!" The series focused on how much money you really need to retire, and the various economic factors that can impact your retirement nest egg. The series concentrated mainly on the financial side of retirement, and neglected the emotional side of retirement. If you did not read this series and are interested, click here.

I thought it might be interesting to have someone who specializes in retirement and life transitions to provide their expertise on the emotional aspect of retirement, and I am pleased to introduce a guest post by Betty Hansen, whose company Crossroads Planning Group Inc. deals with retirement, succession and estate planning. Betty is going to provide two guest posts: today's post which will focus on the emotional side of retirement and a second post next week which will focus on why entrepreneurs become emotional wrecks once they retire :)

Retirement or Refirement? 

By Betty Hansen


There’s a new word out there and I like it. Refirement. The next stage of life has been referred to as Refirement not Retirement. Let’s rejuvenate ourselves with both external and internal enthusiasm for the world around us instead of having our world controlled by the concept of retirement.

There is a negative suggestion of being tired in retirement. Let’s retire the word retirement.

Refirement…. To teach, surprise and give. This is what refirement should be all about.

I have a friend who was looking forward to retirement for years and now that it is here - it’s a letdown. I hear no enthusiasm in her voice when I should be hearing all sorts of excitement about what she’s doing, what she’s going to do as well as what she’s going to learn. Nothing.

What happened? Did the anticipation of retirement overshadow the reality of retirement? I think so.

I’ve also heard “I’m not doing anything – I’m retired”. Great! There has to be something to get you up in the morning. There may be physical and/or mental conditions that will prevent many activities but we have brains and we can use those brains, in many cases, to create stimulating activities no matter what the state of our physical or mental health.

The bottom line is that we are responsible for our own happiness, our own enjoyment of life and for what we create as our legacy – and I’m not talking money here! Don’t misunderstand, money can certainly smooth the path to what we want to do, but we have to decide initially what it is that is going to create a vital and vibrant future for us.

If the notion of a formal stopping point called retirement is removed and consideration is given to how to mix work, play and family, the outlook can be changed from deciding that one is “past it” to “how can the next stage of life be refired?”

So what do we do now? I believe that we have to go back to our roots and decide what we want to do with the rest of our lives. This can be a very simple or a very complex process, but either way it will include evaluating the skills, knowledge and experience that you have and incorporating them into your dreams for the future.

You’re still the same person that you were before you retired and as a teenager full of dreams and ideas. The vital and vibrant future that can be created as an encore can surpass the success that was enjoyed prior to retirement. Realize that it is never too late to do the things you always thought you would like to do.

Everyone is unique and the biggest contribution to making this world a better place may very well come in the refirement phase of life. There are plenty of options for people who want to contribute to society in some way utilizing their enthusiasm for creativity and compassion as well as making every day an adventure.

When they reach retirement many people age rapidly; losing their drive, motivation and purpose. Conversations focus on the past, weather and aches and pains.

Consider the phrase “What about me?”. Depending on how it is said it can be “I’m feeling sorry for myself” or it can be articulating the intention to “refire”.

In the book “What makes Olga Run?” by Bruce Grierson, the author makes the following observation:

“To have a mission in life, something to get you up, some valuable role to play: that is a huge part of ageing gracefully. The Japanese have a word for it - ikigai (eekee-guy). Rough translation: the belief that ones’ life is worth living. Studies have found that those who have ikigai live longer”. This is an enlightening and entertaining book that everyone over the age of 40 should read!

Happy Refirement!

Betty’s company, Crossroads Planning Group Inc., helps familes transition their business from one generation to the next while encouraging family harmony. Betty believes that communication is the foundation of effective retirement, succession and estate planning. Please feel free to contact her directly at 519.269.9634 or by email at bhansen@crossroadsplanning.com. More information is available on Betty’s company website, www.crossroadsplanning.com.


The blogs posted on The Blunt Bean Counter provide information of a general nature. These posts should not be considered specific advice; as each reader's personal financial situation is unique and fact specific. Please contact a professional advisor prior to implementing or acting upon any of the information contained in one of the blogs.

Monday, September 29, 2014

Best Tax Blog! It's Bean Four Years in the Making

On September 20th, I was honoured to win the 5th Annual Plutus Award for the Best Tax Blog (after being a nominee the last two years). This is a prestigious American-based award ceremony celebrating the best in the personal finance blogosphere; winning the Plutus essentially means I won for the best tax blog in Canada and the United States.

Awards are subjective and there are several excellent tax blogs out there. Nevertheless, it was satisfying to win, for three reasons:

1) The award is selected by my blogging peers.

2) As a former jock, I am competitive and like to win anything.

3) The awards were held on the fourth anniversary of my blog which started on September 20, 2010. How, coincidental is that?

Today’s post is number 350! That is a lot of posts when you consider the technical nature of many of my topics, and the fact that I tend to write long blogs, despite advice to the contrary. I cannot believe I have been blogging for four years and have approximately 1,200,000 page reads.

I have no idea how many more blogs I have in me. I would have expected to have exhausted my material by now, but somehow, I seem to keep coming up with topics (although I do now occasionally have variations on topics previously covered).

I am often asked where I find the time to write, and how do I keep coming up with new ideas for my blogs? To be honest, I am lucky. Writing The Blunt Bean Counter does take several hours a week, but I am fortunate that I can hear something in a conversation, discuss an issue with a client, and a blog jumps out at me, and I can write it in quick order. I know for many, writing is a tortuous process.

So why am I still doing this? There are probably four reasons:

1. I enjoy educating people on tax and financial matters, while being provided the forum to voice my opinion.

2. I have met many interesting people through my blog both directly and indirectly.

3. Several readers have engaged me to be their corporate or estate accountant (unfortunately, due to my workload, I cannot take on personal tax clients anymore and have respectively turned down numerous requests).

4. The blog has given me and my firm, Cunningham LLP, visibility and credibility. I would never have imagined when I wrote my first post and two people read it (my mom and someone by accident), how much attention it would garner.

There is a fifth reason. The tax blog groupies, but shush, I don’t want my wife to know that one.

I am fortunate to have several long-time readers who offer encouragement via comments on the blog or by email, and once in a while, constructive criticism. I have had many people approach me at various functions to introduce themselves to me as readers, which I still find mildly amusing. I am often told they like my blog because I break down complex topics into somewhat understandable blog posts (you can thank my wife, who constantly tells me to write in “plain English”) and that I have a bit of a personality in my posts. But that comment is always prefaced with “for an accountant”.

The only downside to this blog is that some people think because I write a blog they can call or email me with the most complex situations, and I will provide them free tax advice. I do try and answer almost all questions posted to the comments section on my blog; although, I often provide the caveat that I “do not provide specific personal or corporate tax planning advice on this blog”. I do however, try and point the questioner in the right direction, without providing a direct answer to their fact specific question.

So where am I today? I started working on a book a couple of years ago (it is not really a tax book, but more a financial and money matter book), but I just do not have the time to get it done and am not sure I ever will. Thus, I changed gears a few months back and started putting together a Best of The Blunt Bean Counter book. In my humble opinion, it is actually not a bad read with a nice flow when my blogs are grouped together by topic area. The book is strictly being done for business promotion purposes, and I do not expect to make enough money to even buy a new suit from it.

I have a few other interesting things happening and some ideas for the future of the blog, but I will discuss those at a later date.

To circle back to my Plutus Award, I would like to thank my readers who encourage me to keep writing and the numerous financial bloggers, guest bloggers, writers, and journalists, who have helped me to achieve this level of recognition.

The blogs posted on The Blunt Bean Counter provide information of a general nature. These posts should not be considered specific advice; as each reader's personal financial situation is unique and fact specific. Please contact a professional advisor prior to implementing or acting upon any of the information contained in one of the blogs.

Monday, September 22, 2014

Corporate Small Business Owners: Beware; the Capital Gains Exemption is not a Gimme

One of the biggest misconceptions small business owners have is that they have automatic access to the $800,000 capital gains exemption (“CGE”) upon the sale of the shares of their corporations (Note: beginning in 2015, the $800,000 will be indexed for inflation). Nothing can be further from the truth. There are three complex tests that must be met in order to qualify for the exemption and something as innocuous as imposing a holding company (with significant cash and investment assets) between you and your operating company may disqualify the shares.

Warning!!! Before I move forward, please note that I am “dumbing down this post”. You may think it complex, but I am leaving out significant issues, definitions and details to make it somewhat readable. Do not rely upon this blog for your capital gains planning, use it only to gain an understanding of the issues and please contact your tax advisor before undertaking any planning discussed in this post. In fact, to emphasize the complexity of this issue and how intricate and fact related the planning is, I will not answer questions and respond to comments on this post. Sorry about that.

The Capital Gains Exemption


In order to access the CGE, the shares you sell must meet the definition of a "qualified small business corporation share” (“QSBC shares”). Sounds simple, but this provision and the related provisions often prove to be a tax quagmire for many practitioners.

The shares must meet three tests to be considered QSBC shares and become eligible for the CGE.

Small Business Corporation Test


At the time you sell your shares, they must be shares of a Small Business Corporation (“SBC”). A SBC, amongst other criteria, must be a Canadian-controlled private corporation whereby all or substantially all (meaning 90% or greater) of the fair market value (“FMV”) of the assets of which at that time is attributable to assets that are used principally in an active business carried on primarily in Canada.

In plain English: at the time of the sale, the company must be using a minimum of 90% of its assets in carrying on an active business in Canada. In other words, if you have more than 10% of the FMV of your corporation in passive assets such as cash, stocks, rental real estate, you may be offside the rule.

It is important to note that the Goodwill (which is often the largest asset) of a business will count as an asset used in an active business. However, generally cash, portfolio investments and intercompany loans will not qualify as active assets.

Holding Period Ownership Test


This test requires that the shares cannot have been owned by anyone other than the individual or a person or partnership related to the individual, throughout the 24 months immediately preceding the disposition time. The two year test is very confusing. It is a rule that at its core is intended to prevent anyone not related to you from holding the shares within the last two years. However, on one hand the 24 month rule provides for exceptions such as if you transfer a proprietorship or partnership to a corporation, yet if you incorporate a new company and hold the shares less than 24 months, you will be disqualified.

In plain English: in most cases you will be required to have held the shares two years prior to the sale.

Holding Period Asset Test


If you thought the above rules were complicated, this test makes the other rules seem simple.

This test requires that throughout the 24 months immediately preceding the sale, more than 50% of the FMV of the corporation's assets must have been attributable to assets used in an active business. For this purpose, assets considered to be used in an active business consist of:

1) Assets used principally in an active business carried on primarily in Canada by the corporation or a related corporation;

2) Certain shares or debt of connected corporations; and

3) A combination of active business assets or certain shares or debt of connected corporations

In plain English: at least 50% of the company’s assets must have been used in an active business throughout the two-year period prior to sale.

Where you have a holding company ("Holdco") or stacked companies (Holdcos owning Holdcos) ultimately owning the shares of an operating company, the threshold percentage for meeting the Holding Period Asset Test may become 90% instead of 50%. These rules are far too complicated to discuss, suffice to say, if you have a chain of companies, at least one of the companies in the chain must meet the 90% threshold percentage over the two-year period.

As you can see, the CGE is no gimme. You need to ensure you hold the shares 24 months, at the time of sale 90% of the assets are used in an active business and over the prior 24 months, 50% (in some case 90%) of the FMV of the assets were used in an active business.

Traps and Obstacles


Holding Companies


Many small business owners utilize a Holdco for creditor proofing, which is often recommended. However, over years the Holdco may end up owning substantial investment assets. These assets may be problematic for the following reasons:

1. Since Holdco owns your operating company ("Opco"), you have to sell your holding company shares to a buyer to qualify for the CGE and if you have substantial assets, you need to remove them prior to a sale. This may trigger a substantial tax liability and/or cause the shares to fall offside the QSBC rules.

2. Many people use their Holdco to hold the shares of other corporations. This is very problematic when you want to sell your shares of Company A, but your Holdco not only owns Company A, but also owns shares of Company B and Company C. How do you get the shares of Company B and C out of your Holdco prior to the sale? The answer is - not easily.

As I have written in prior blogs, I often suggest rather than automatically interposing a Holdco between you and your Opco, you may wish to consider using a family trust with a corporate beneficiary (a Holdco typically owned by you). Thus, instead of the cash being plugged up in your Holdco and potentially putting you offside the QSBC rules, your Opco pays a dividend of the excess cash to your family trust which in turn allocates a tax-free dividend (in most cases) to the holding company beneficiary of the family trust.

This is a very subtle point, but now instead of having the dual problem of your Holdco company potentially having too many investment assets and/or you needing to sell your Holdco shares to access the capital gains exemption, you can now just sell the Opco shares, as the operating company is owned by the trust. The Holdco company even if it has accumulated substantial assets, is not part of the three CGE tests as it has no direct interest in the company being sold.

Safe Income


I have no desire to get into this complicated issue. However, where a Holdco or Opco has other assets such as excess cash, shares in other corporations or real estate that a purchaser does not require, it is often necessary to transfer these assets out of Opco or Holdco (known as purification). This is often done by cross share redemptions that result in dividends. All you need to know for purposes of this post is that if an operating company pays a dividend to another corporation in contemplation of a sale and the dividend exceeds the recipient’s proportionate share of safe income (in very simple terms, retained earnings of the dividend payer) the excess portion becomes a taxable capital gain. This can be very problematic when you are trying to purify your corporation of excess assets prior to the sale to qualify for the CGE and you definitely require your tax advisor's assistance.

Cumulative Net Investment Loss


The Cumulative Net Investment Loss (“CNIL”) account tracks an individual’s net historical investment income. Essentially it is the sum of your investment income, such as interest and dividends, less investment expenses such as interest expense, carrying charges, losses from limited partnerships and resource deductions from flow-through shares. If the cumulative balance is negative, this balance restricts access to the CGE. The negative balance can in many circumstances be eliminated by having your company pay you a dividend prior to any sale, subject to the safe income rules noted above.

Allowable Business Investment Losses


An Allowable Business Investment Loss (“ABIL”) typically results from capital losses on shares and debt in private Canadian corporations. If an individual has realized an ABIL in a prior year, it will reduce his or her CGE available to claim. Thus, you need to confirm if you have ever made such a claim prior to utilizing your CGE.

Insufficient Dividends


This issue is way beyond the scope of this article, however, where it is reasonable to conclude that a significant portion of the gain is attributable to the fact that a minimum amount of dividends has not been paid annually on any class of shares in the corporation, other than classes of "prescribed shares”, the CGE can also be restricted. Ask your accountant if this is an issue for you.

Planning


Prudent planning would suggest that you and your advisor consider these rules far in advance of any potential sale, so you can monitor whether your corporation is onside the rules. Where the corporation falls offside you can “purify” the corporation of any offending assets. Purification should be ongoing, because if you have to purify at the last minute, there is a good chance you will not meet the various criteria to qualify for the exemption.

If you are still with me, I am sure you will agree that you should never assume your corporation’s shares will qualify for the CGE. The morass of rules requires you and your advisors to carefully navigate the rules to ensure your shares will qualify when you decide to sell your corporation.

The blogs posted on The Blunt Bean Counter provide information of a general nature. These posts should not be considered specific advice; as each reader's personal financial situation is unique and fact specific. Please contact a professional advisor prior to implementing or acting upon any of the information contained in one of the blogs.