The first $750,000 of the capital gain on qualified small business corporation (“QSBC”) shares is exempt from personal income tax by virtue of the capital gains exemption. There are three basic tests for the capital gains exemption:
Since professional associations have recently permitted the incorporation of professionals, it has become more popular for professionals to incorporate their practices to take advantage of lower corporate tax rates and access to the capital gains exemption.
As a relieving measure, two of the three tests for the capital gains exemption are relaxed in those circumstances where the professional corporation has not been in existence for a minimum of 24 months. There is a provision in the Act that states that prior to the incorporation of the professional practice, the shares of the corporation shall be deemed to be owned by a related person provided that at least 90% of the assets of the unincorporated practice were transferred to the corporation. If the condition is met, then the 24-month holding period test will be met as well because a related person of the individual selling the shares shall be deemed to own the shares for the required amount of time.
The 24-month asset test is also relaxed by virtue that it only has to be met for the period that the corporation was a CCPC. Therefore, if the professional practice were incorporated just prior to the sale, this test would only have to be met for the period of time that the corporation was in existence.
The point in time test still has to be met for the individual to qualify for the capital gains exemption. However, if this test is not immediately met, there are various purification techniques that the professional can pursue with his tax advisor to ensure qualification for the capital gains exemption.
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