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Issuing Shares in exchange for real estate: more on the lifetime capital gains exemption…

By December 20, 2013December 15th, 2021Corporate

In a previous blog, I discussed the situation of a dentist who personally owned real estate but wanted to transfer it to a corporation to take advantage of the lifetime capital gains exemption.  In this blog, I’m going to discuss a question that may come up during this transaction: does a shareholder receive shares on incorporation BEFORE receiving shares on transferring in their real estate to their corporation?

I would argue (although you should always confirm with an accountant or tax expert) that NO shares should be issued on this rollover in order to allow the shareholder to qualify for the lifetime capital gains exemption.  The reason being that the twenty four (24) month ownership rule (as previously discussed in the blog I linked to above) applies only when a dentist disposes of all or substantially all of the assets used principally in an active business.  When a dentist acquires initial shares from a corporation, it’s typically for a nominal amount (e.g. $1.00 or $100.00).  This means that those particular shares may need to be held for two (2) years as the property (i.e. cash) that was exchanged for the shares do not constitute assets used principally in an active business.

So, since directors are allowed – under the Business Corporations Act – to have their initial shareholders meeting within eighteen (18) months after incorporating, they don’t actually need to rush to issue initial shares upon incorporation.  They can simply have the corporation issue shares to the dentist on the rollover of the dental practice assets (and perhaps real estate too).

Tax law is wonderful, isn’t it?