Capital Gains Exemption For Business

Q: I have heard that corporations in Canada have a capital gains exemption of $500,000. With regards to this piece of information, I have a number of questions: 1) is this $500, 000 per year, or a one time amount? 2) where is this mentioned in the tax code? ... and the most important questions 3) if I were to engage in heavy stock trading, would I be able to set up a small corporation (with myself as an employee) and thus pay no tax on the first $500,000 in capital gains? Presumably if the money were subsequently transferred to me, I would pay tax equivalent to my current rate of taxation (or would I -- are there other "management fees" that I should be aware of?) 4) do the various Canadian stock brokerages (e.g., T.D.Acess) allow corporations of this type to set up accounts? If not, who does? Thanks in advance for your help

A: -The capital gains exemption isn't available to corporations themselves but for the sale of shares in certain types of corporations. For the exemption to apply the shares must be in a corporation that is essentially a Canadian Controlled Private Corporation that operates an active business (or a farm corporation). This means the exemption is not available to corporations that are simply set up as a holding company for investments. I believe the ITA section is 110.6 (but i'm not positive) > I have heard that corporations in Canada have a capital gains exemption > of $500,000. With regards to this piece of information, I have a number > of questions: It appears you have confused a couple of concepts. I will try to answer the questions below, however, keep in mind the following concept - the deduction is available to INDIVIDUALS that invest in a very specific type of Canadian Corporation - a Canadian Controlled Private Corporation (CCPC) that meets very specific income and asset tests. > 1) is this $500, 000 per year, or a one time amount? The deduction is a lifetime amount ... in other words, you can deduct up to $500,000 in your lifetime on multiple investments. > 2) where is this mentioned in the tax code? Section 110.6 of the Income Tax Act. > ... and the most important questions > 3) if I were to engage in heavy stock trading, would I be able to set up > a small corporation (with myself as an employee) and thus pay no tax on > the first $500,000 in capital gains? Presumably if the money were > subsequently transferred to me, I would pay tax equivalent to my current > rate of taxation (or would I -- are there other "management fees" that I > should be aware of?) As stated, your initial understanding is wrong ... therefore this strategy won't work - the corporation you created does not meet the income test for you as an individual to make the capital gains deduction. > 4) do the various Canadian stock brokerages (e.g., T.D.Acess) allow > corporations of this type to set up accounts? If not, who does? Again - not relevant ... the provision does not apply to corporations making investments, but individuals investing in private corporations ... therefore stock brokerage firms don't need to set up these type of accounts. .

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