Katie has Canadian public company shares that are worth $50,000 and pay a dividend of $2,500 each year. Her adjusted cost base on these shares is $35,000. She is already in the top tax bracket. She would like your advice on the following proposed transactions:

Sell the shares to her husband

(1) Sell the shares to him for cash of $50,000

(2) Sell the shares to him for a non-interest bearing note of $50,000

(3) Sell the shares to him for cash of $40,000.

Sell the shares to her 25-year-old daughter

(4) Sell the shares to her for cash of $50,000

(5) Sell the shares to her for a non-interest bearing note of $50,000

(6) Sell the shares to her for cash of $40,000.

 

Selling shares to her husband for cash of $40,000 can be good due to low capital gain but selling shares with a non-interest-bearing note would be more preferable as it does not increase current earnings immediately but will affect future earnings.

Step-by-step explanation

The cash you make from selling shares is referred to as a capital gain. Every Canadian is entitled to a lifetime capital beneficial properties exemption, which means men and women are allowed a positive quantity of capital features they don't have to pay tax on. This will increase with inflation every year: in 2017, it used to be around $830,000. That ability you solely have to pay tax on any quantity above that threshold.

In Canada, 50% of the cost of any capital positive aspects are taxable. Should sell the investments at a greater charge than paid (realized capital gain) — it desires to add 50% of the capital obtained to the whole income. This capability the quantity of extra tax simply pays will differ depending on how much you are making and what different sources of earnings you have.

Here are the policies for eligibility for the exemption:

•  Share can't be selling  to a family member
• The person or a family member ought to have owned the shares all through the 24 months earlier than the sale
• When the character sells the shares, at least 90 percent of your company's assets—meaning something the corporation owns that provides a fee to it—must be engaged in doing business in Canada.

Set up a family trust: If you anticipate sharing your wealth inside your family, you can seem to be at putting up a household trust. Anyone who is part of the have faith turns into a beneficiary, which means that if company shares are later bought to anyone outside of the trust, the price of that sale is distributed throughout all household members. Because the money from the sale of shares is dispersed throughout a couple of household members, every person's capital acquired is solely a part of the whole quantity.

Defer taxes: Share transfer income can reduce earnings from taxable income and it will allow it to pay off until it arises. Transfer the shares over time—if your intention is for a household member to take possession of the share, the person can sell the shares over a prolonged length of time to unfold out the taxes you have to pay.

Considering the above aspect it would be more preferable to sell the share with a non-interest-bearing note so that 24-month criteria can be fulfilled and defer tax benefit can opt.