Entrepreneurship & Small Business

Taking Money out of your Business as Capital Gains without Selling?

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  • Apr 18th, 2017 2:19 pm
[OP]
Sr. Member
Jul 30, 2008
776 posts
16 upvotes

Taking Money out of your Business as Capital Gains without Selling?

Is there any way to do this?

I ask because I notice that there are exchange-traded income funds in which almost all of the distributions consist of "Return of Capital". This leads to getting the money initially invested out, tax free. But, once the corporation has returned more capital than you put in when (for example, if you bought a security dirt cheap that got hammered in 2008, and after a few years their agressive distributions returned all of the capital you put in) the onus is on you as an individual to start paying capital gains tax on those distributions. Is the same kind of thing possible with a small/medium privately held Canadian corporation?

Otherwise, can this be done using some kind of share class swap or some other method to crystallize the capital gains? Swap Class A shares for Class B shares purely in order to lock in the capital gains, then pay the capital gains tax (and thus take the money out via capital gains tax instad of dividend or income method).

My accountant does not seem to have any experience in this, but for the Option 1 above I'm wondering why this can be done with the exchange-traded securities but not a private business (maybe it has to be a trust company or some special class of corporation) and for Option 2, I could swear I read about this in the financial post a few years ago, but can't seem find it anymore.
2 replies
Newbie
May 20, 2012
91 posts
8 upvotes
VANCOUVER
Simple answer - No.

You would need to sell it to an unconnected third party.
Newbie
Jan 18, 2017
47 posts
27 upvotes
ROC is simply the fund giving you your own money back. There's nothing magical about it - No different than you going to the bank and drawing out cash from your savings account.

What you're describing would likely trigger deemed dividends under 55(2). If you sell to a third party though, then you start to be able to get in to doing some fancy planning.
tribe1689 wrote:
Apr 17th, 2017 12:51 pm
exchange-traded income funds in which almost all of the distributions consist of "Return of Capital".
______
Canadian & US tax guy

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