Planning the future of your family business can be difficult. Will your children make wise decisions? Will the market be forgiving if they don’t? The questions are seemingly endless, but asking your life insurance advisor about pairing the benefits of the capital gains exemption with your life insurance policy is an easy one. Is it worthwhile? The answer will be, most likely, a resounding yes. 

The capital gains exemption is exactly what it sounds like – an opportunity for individual taxpayers who own shares in qualifying small business corporations to be exempt from claiming all of their capital gains. As a result, they may be able to reduce their taxable income when they file their income tax. 

While this opportunity is not one to be missed, a provision in the Income Tax Act sometimes makes it difficult to apply the capital gains exemption when transferring shares of a business to the next generation. It is the most ideal if the son or daughter of the current business owner is able to fund the purchase of the shares from their parents personally, instead of using a holding company. 

It is possible, however, that the son or daughter who will be taking over the business may not be financially capable of funding the shares straight from their back pocket. This is where life insurance comes in. By using a life insurance policy as collateral for a loan, children are able to borrow in a tax effective manner to fund the purchase of their shares. They are able to secure their place in the family business while their parents are still able to make use of the capital gains exemption. 

The capital gains exemption can be realized for those qualifying businesses and corporations which have 90% of their fair market assets used principally in an active business carried out primarily in Canada. 

Source: Charts are sourced to https://www.thelinkbetween.ca/ 

The contents of this publication were researched, written and produced by The Link Between (https://www.thelinkbetween.ca/) and are used by Echelon Wealth Partners Inc. for information purposes only. 

Disclaimers 

Echelon Wealth Partners Inc. 

The opinions expressed in this report are the opinions of the author and readers should not assume they reflect the opinions or recommendations of Echelon Wealth Partners Inc. or its affiliates. Assumptions, opinions and estimates constitute the author's judgment as of the date of this material and are subject to change without notice. We do not warrant the completeness or accuracy of this material, and it should not be relied upon as such. Before acting on any recommendation, you should consider whether it is suitable for your particular circumstances and, if necessary, seek professional advice. Past performance is not indicative of future results. The comments contained herein are general in nature and are not intended to be, nor should be construed to be, legal or tax advice to any particular individual. Accordingly, individuals should consult their own legal or tax advisors for advice with respect to the tax consequences to them.