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Every resident of Canada is given a lifetime $750,000 capital gains exemption amount. This means that you may have up to $750,000 in capital gains (excess of selling price over original price of the shares) and not pay tax on the earnings.

A gain takes place on the sale of shares when the gains (i.e. Selling price) is larger than the original price plus any costs to sell (i.e. Commissions). One half of this gain is added to your income and is subsequently taxes. The capital gains exemption enables you to have $750,000 in capital gains, which is like $375,000 in taxable capital gains.

You subtract $750,000 from your capital gain and then divide the remaining amount by two and pay tax on that final amount. If your capital gain is less than $750,000, you use the exemption to bring your capital gain to nil, and you do not pay tax on the transaction and you’ve got more deduction room to be employed for future transactions.

These following 3 tests must be passed to be eligible for this exemption:

– Qualified Small Business Corporation test
* Must be a Canadian Controlled (aka the shareholder is Canadian), Non-public (i.e. Shares are not traded on any stock exchange) Corporation, or “CCPC”
* 90% of the market value of the assets of the corporation need to be used for active business carried on in Canada at the time the shares are being sold.
– 24-month Holding Period test
* In the 24 months prior to the sale, the shares must have been all held either by the sole shareholder or an individual or partnership related to them
– 50% of Assets test
* This test says that at least 50% of the market value of the assets in the enterprise have to be used for active business carried on in Canada for the 2 years prior to the sale of the corporation.

To find out more regarding this topic call a local accounting firm.

Rob Green is a freelance writer who works with Vancouver accountants TWM & Co. He writes regular accounting articles covering a big range of Canadian accounting procedures, practices and laws.