QSBC shares
In general terms, a QSBC share at the time of the disposition must be a share of a “small business corporation”, which is a Canadian-controlled private corporation (“CCPC”), all or substantially all of whose assets are comprised of:
- assets used principally in an active business carried on primarily in Canada,
- shares or debt in other small business corporations with which it is “connected” (it either controls the other corporation or owns at least 10% of the shares (votes and value) of the other corporation), or
- any combination of the above.
The Canada Revenue Agency (CRA) takes the position that “all or substantially all” means 90% or more, and that “principally” or “primarily” means more than 50%. If the disposition occurs as a result of death (there is a deemed disposition of capital properties upon your death), the shares may qualify if the above criteria were met at any time within the 12 months before death.
In general terms, a CCPC is a private corporation resident in Canada that is not controlled by non-residents, public corporations, or a combination of the two.
There are also two holding period requirements for the shares. First, for the 24 months prior to the disposition by the taxpayer, the QSBC share must not have been owned by anyone other than the taxpayer or a related person. Second, throughout the 24-month period, more than 50% of the corpo-ration’s assets (on a fair market value basis) must have been comprised of assets used principally in an active business carried on primarily in Canada, or shares or debt in other CCPCs that met the same 50% threshold or in some cases the “all or substantially all” threshold. (The actual requirements are very technical in detail.)
ABILS reduce the exemption
The capital gains exemption that can be utilized in a particular year is reduced to the extent of allowable business investment losses (ABILs) claimed in the year or previous years. In general terms, an ABIL is one-half of a capital loss incurred on the disposition of a share or debt in a small business corporation; certain other conditions apply.
Generally, an ABIL is deductible against any sources of income, rather than just taxable capital gains. (Allowable capital losses can normally only offset taxable capital gains.)