Over the years, we have often found many pharmacy owners unprepared to take advantage of the Qualifying Small Business Exemption (QSBE).
By Mike Jaczko, BSc. Phm, RPh, CIM®
As a pharmacy owner, you may be aware that when you dispose of shares in your pharmacy business you could receive an exemption on all or a portion of the capital gains that ordinarily would be taxable. This is due to the Lifetime Capital Gains Exemption (LCGE) which states that for 2015, up to $813,000 of capital gains is exempt from taxation.
This LCGE is available to individuals who are disposing of, or deemed to have disposed of Qualified Small Business Corporation (QSBC) shares.
For the shareholder of a small business corporation, this valuable benefit could reduce or eliminate the tax bill that otherwise would be payable upon the sale or succession of your pharmacy business.
The important thing for pharmacy owners to understand is that in order for this benefit to come to fruition, some conditions must be met. It is essential that preparation be done well in advance for a future sale or business succession. In order for your pharmacy business to be considered a QSBC and therefore qualify for the QSBE, it must meet the following two conditions:
#1. Ownership of shares
The shares of a pharmacy business corporation must not have been owned by anyone other than the individual taxpayer or a related person during the 24 months immediately preceding the disposition.
#2. Use of corporate assets
Also during this 24-month period, 50% or more of the fair market value of the corporate assets must have been used in an active business conducted primarily in Canada.
An additional requirement is that at the time of the disposition (sale or upon death of shareholder), all or substantially all (defined as 90% by the Canada Revenue Agency) of the fair market value of the assets must have been used to produce active business income.
Some examples of corporate assets that could put your pharmacy operating company offside with respect to its being a QSBC are excessive cash, marketable securities (bonds, stocks and other investments), and non-business related real estate.
Before the sale of a pharmacy business, experienced tax advisors take appropriate pre-emptive measures to ensure that the 90% rule is in place at the closing of the sale transaction. This usually involves a “purification” of the pharmacy corporation to distribute or transfer the non-business related assets.
Here are some examples as to how experienced tax advisors could accomplish this:
- Paying a taxable dividend to shareholders
- Paying down any bank debt or trade payables
- Pre-paying corporate income tax installments
Finally, it is important for the pharmacy business owner to ensure that the business is indeed considered a qualified small business corporation – this can be confirmed with a qualified tax advisor. Furthermore, a sale of shares to either a non-resident or a public corporation may cause the denial of the capital gains exemption, as the corporation may no longer be a Canadian Controlled Private Corporation.
The rules governing whether or not an individual who owns shares in a small business corporation receives a capital gains exemption are complex, and are ignored at the pharmacy owner’s peril! It is vital to obtain professional advice when undertaking the appropriate planning.
Mike Jaczko, a pharmacist by background, is a portfolio manager and partner of KJ Harrison, a Toronto-based private investment management firm serving individuals and families across Canada. For more information on this topic, email firstname.lastname@example.org.