How are capital gains taxed when I sell shares in my private Ontario company?

When you sell shares in a private corporation, the proceeds minus your adjusted cost base represent a capital gain under the federal Income Tax Act. The taxable portion flows through your personal T1 return and is taxed at your marginal rate, with both federal and Ontario provincial tax applying.

The key planning opportunity for qualifying shareholders is the lifetime capital gains exemption (LCGE), which can shelter a significant portion of the gain from tax entirely if the shares are "qualified small business corporation shares." The QSBC test is multi-part: at the time of sale, 90% of the fair market value of the corporation's assets must be used principally in an active business carried on in Canada; the corporation must be Canadian-controlled; and the shares must have been owned by the individual (or a related person) for at least 24 months before the sale, with the active business test met throughout that period.

Pre-sale structuring is often required to meet these tests — for example, purifying the corporation by removing excess investment assets, or completing an estate freeze to allow family members to also access the LCGE. Because the exemption can represent a very large tax saving, professional advice well in advance of any planned sale is essential.