Deb MacPherson is leader of KPMG Enterprise’s Tax practice in Canada. She is based in Calgary.

Deb MacPherson, KPMG Enterprise | October 16, 2013 4:45 PM ET  , FINANCIAL POST

LIFE TIME CAPITAL GAIN EXEMPTION CORPORATION  CAPITAL GAIN

Plan to take full advantage of capital gains exemption : There are probably few if any business owners who have not heard about the lifetime capital gains exemption that can apply to the sale of qualifying private company shares. If planned well in advance, owners and their family members could each save up to $200,000 in tax, depending on the province, when they sell the shares of the business.

Every individual is entitled to a lifetime “capital gains exemption” up to $750,000 on qualifying small business shares (and farm and fishing property). This exemption increases to $800,000 in 2014 and will be indexed for inflation starting in 2015.

Your exemption is limited to your total gains on qualifying property over your lifetime. However, you don’t have to claim the exemption all at once, you can carry forward any unused amount.

Providing that the shares you’re selling meet the requirements, the exemption can provide substantial tax savings. For example, on a capital gain of $800,000 in 2014 that didn’t qualify for the exemption, you would be taxed about $180,000, depending on the province.

To be eligible for exemption, the shares must be “qualified small business corporation shares.” The definition of this term is complicated but generally means that at the time of the sale substantially all (meaning 90% or more of the value) of the business’s assets must be used for carrying on an active business in Canada or the assets must be shares or debt in other qualifying small business corporations.

Also you, or a person “related” to you, must have owned the shares for two years prior to selling them. And throughout the two years, more than 50% of the corporation’s assets must have been used principally in an active business carried on in Canada or invested in other small business corporations (or any combination of these two).

If your company owns assets such as investments that aren’t used in its active business, you may have to remove them from the corporation to meet these asset-test conditions. It is a good idea to set up a regular program to withdraw excess cash and assets from the company because unpredictable events could trigger the sale of the shares for tax purposes.

or example, the death of any shareholder will cause a deemed disposition of that shareholder’s shares at their fair market value and the shareholder’s estate will have to pay tax on any capital gain (unless the shares are left to a surviving spouse). If the shares qualify for the capital gains exemption, it will be available to the deceased shareholder’s estate if he or she has not used the full amount.

You may be able to effectively increase the available exemption if your spouse and adult children also own shares in the corporation. Rather than family members owning shares directly, many business owners use a family trust, with beneficiaries that may include a spouse and both minor and adult children. If you use such a trust, your family members may be able to take advantage of their exemptions, thereby increasing the total tax savings, as long as the trust takes the appropriate actions.

If your company’s shares and shareholders qualify now for the capital gains exemption, you may want to “crystallize” the exemption, which means triggering a capital gain on your shares while continuing to own (or at least control) the corporation. Doing so will permanently increase your adjusted cost base of the shares and may eliminate the need for you to monitor whether the company is meeting the requirements for a qualified small business corporation.

Several options are available to crystallize a capital gains exemption, including selling shares to a family member or exchanging existing shares for a new class of shares; it’s a good idea to seek professional advice before doing this. You may want to consider delaying crystallizing until 2014, or crystallize $750,000 in 2013 and then trigger another $50,000 capital gain in 2014 to take full advantage of the increased $800,000 exemption.

If your qualified small business corporation goes public, you can make a special election to take advantage of the capital gains exemption without having to actually sell your shares. Once the company is a public corporation, the shares will no longer qualify for the exemption.

Making good use of the capital gains exemption can leave you with more money in your pocket when you sell your business, as long as you pay careful attention to making sure your company’s shares will qualify when the time comes.

Deb MacPherson is leader of KPMG Enterprise’s Tax practice in Canada. She is based in Calgary.