Lifetime Capital Gains Exemption, And Converting Income Into Capital Gains

Table of Contents

1. Lifetime Capital Gains Exemption
   1. Current Rules
   2. Perceived "Evils"
   3. New Measures
      1. Age Limits
      2. Reasonableness Test
      3. Trusts
   4. 2018 Election
   5. Coming into Force
2.  Converting Income into Capital Gains
   1. Current Rules
   2. Perceived "Evils"
   3. Amendment to Section 84.1
   4. New Section 246.1
   5. Coming into Force
   6. Scope of New Rules

 Lifetime Capital Gains Exemption

Current Rules

• Lifetime capital gains exemption (LCGE) applies to gains arising from dispositions of "qualified small business corporation shares" (QSBCS)
• LCGE shelters baseline amount of $800,000
• Indexed to inflation
• 2017: $835,716
• Can be claimed by an "individual" (other than a trust)
• LCGE can be accessed through a trust
• With proper designations, character of capital gain is preserved when allocated to beneficiaries
• Beneficiaries then claim LCGE on their personal returns in respect of gain flowed to them
• Common planning technique to multiply access to LCGE

Perceived "Evils"

• Government concerned with use of family trusts to "multiply" access to LCGE
• "Individuals have used these arrangements in a way that permits them to claim the exemption even though they may not have invested in, or otherwise contributed to, the business value reflected in the capital gains they realize on the disposition of property that is eligible for the exemption."
• Canada, Department of Finance, Tax Planning Using Private Corporations (Ottawa: Department of Finance, July 18, 2017), 28.

New Measures

• Three different measures are being proposed o address LCGE multiplication

1. Age Limits
2. Reasonableness Test
3. Trusts

New Measures – Age Limits

• Under the proposed rules, individuals will not be eligible to claim the LCGE until the taxation year in which they attain the age of 18
• New paragraph 110.6(12)(a)
• Amount that is eligible for the LCGE is reduced by the entire amount of the capital gain where the individual has not attained the age of 17 years before the particular year
• New paragraphs 110.6(12)(c) and 110.6(12.1)(a)
• Where an individual holds property at the time the individual attains the age of 18 years, the portion of the gain that accrued prior to the individual attaining the age of 18 years is not eligible for the LCGE

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