Meeting The Capital Gains Exemption Criteria When A Holding Company Is Involved.

Slide 2
The Section 84 Deemed Dividend Rules

What to do to avoid the deemed dividend trap.

Slide 2
Taxation Issues for Canadian Corporations with Foreign Affiliates

An overview.

Slide 2
Using Joint Ventures To Capitalize On Real Estate Investments

Research tax-efficient structures to facilitate real estate investing.

Slide 2
The Replacement Property Rules

Using the Income Tax Act to avoid tax.

Slide 2
Corporate Tax Planning:

Utilizing the butterlfy.

Slide 2
The Corporate Attribution Rules

Navigating through the delicate nature of non-arms length transactions.

previous arrow
next arrow

Meeting The Capital Gains Exemption Criteria When A Holding Company Is Involved.




The Capital Gains Exemption (CGE) remains one of the most beneficial components of the Canadian tax system.  Rewarding resident Canadian business owners for their contributions to the Canadian economy, the CGE allows for the exemption from tax on the first $913,630 (in 2022) gain on the sale of shares of a Canadian Controlled Private Corporation (CCPC).  For example, if shares in the company were owned at least 24 months prior to the date of sale, and the paid-up-capital (PUC) of the shares was $100, those shares can be sold for up to $913,640 without any tax consequences on the sale, assuming the corporation meets the criteria to claim the CGE.

The 2 main criteria involved when determining the eligibility of the CGE are the:

  1. All or substantially all test: when at the time of sale at least 90% of the fair market value of the assets held by the operating company must be used to generate business income, and


  1. Principal test: where for the 24 month period prior to the sale of the company, at least 50% of the fair market value of the assets must be used to generate business income.


Usually, as business owners grow their companies and accumulate cash, there is the tendency to keep the cash in the company and invest it in a portfolio, eliminating the tax incurred on drawing out the money either as salary or dividends.  This is, however, a sure way to render the company eligible for the above criteria.

A better course of action is to keep only required working capital amounts in the company each year.  Not only does this keep the company eligible for the Capital Gains Exemption but also can protect assets from any future creditor or other legal claims which may arise.

Many owners will insert a holding company into the corporate structure to facilitate tax plans, such as a corporate shareholder of the operating company to which the operating company can issue dividends, and in so doing transfer non-business assets.  This is a good plan to keep the operating company clean of non-business assets, but also presents additional administrative requirements when it comes to becoming eligible for the Capital Gains Exemption.

When there is a holding company owning shares in the operating company, and the control shares in that holding company are owned by an individual wanting to claim the CGE, we now have to make sure that both entities meet the above criteria.  This requirement normally pushes non-business assets out of the holding company to the shareholder to maintain eligibility.



Premium Accounting and Tax Assistance - call Nicholas Kilpatrick at 604-327-9234 to find out more for your business and click here to see our latest first-time offers.


Subsection 110(1)(d) of the Income Tax Act (I.T.A) does provide that, if the operating company is unable to meet the All or Substantially All test, then eligibility can be achieved if the holding company alone meets the All of Substantially All Test for the 24 month period prior to the date of sale.

In various technical interpretations issued by it on the CGE, the Canada Revenue Agency Canada has at times been ambiguous as to the application of ss. 110(1)(d), implying that as long as the holding company meets the Principal test over the 24 month period prior to the date of sale as opposed to the All or Substantially All test, the requirements set out in ss. 110(1)(d) (ie: that the holding company must meet the All or Substantially All test over the 24 month period) are not necessary.

In light of this ambiguity, it’s prudent to obtain a technical ruling from the CRA on a proposed CGE transaction.  Although a technical ruling does not constitute law, at least you’ve exercised some due diligence and can obtain some comfort.

The Capital Gain Exemption can only be claimed by individual shareholders, and the exemption is claimed on schedule 3 of the individual’s personal tax return.  Utilization of family trusts can expand the exemption on the sale of shares in an operating company, thereby distributing more tax-free dollars to individual beneficiaries.

The benefits of utilizing a holding company – operating company corporate structure are solid, from income splitting to protection of assets.  From inception of the structure however, it’s a good idea – and also possibly cheaper – to keep both companies clean of any non business assets unless they’re absolutely necessary.


Nicholas Kilpatrick is a partner with the accounting firm of  Burgess Kilpatrick and specializes in tax structuring and business development for his small and medium business sized clients.  Please visit our website at or on Facebook at Kilpatrick for more information on our firm.

Leave a comment

Your email address will not be published. Required fields are marked *

Want Great Insights, Tax Planning, and Business Videos?

Subscribe To Our Newsletter!

You have Successfully Subscribed!