The federal budget came out over two weeks ago but I didn’t find out until this weekend that the personal lifetime capital gains exemption for small business corporations was raised from $500,000 to $750,000.

This means that when a small business owner sells a qualified small business, the first 750,000 is tax free and capital gains is paid on the rest. You only use this exemption once in your lifetime.

This raises a couple interesting points to consider:

• it’s a big mark on the “pro” side of the column for the age-old “why incorporate” question. Self-employed people are often temped to operate as a sole proprietorship or partnership for simplicity’s sake: lower startup costs to incorporation, no need to file a separate tax return, but being incorported has it’s advantages (like limitation of personal liability) and this one, when time comes to sell the business.
• From a tax planning perspective it starkly demonstrates the downside to “crystalizing” your capital gain exemption. This is a strategy your financial advisor may recommend to you at some point where effectively “lock in” your capital gains exemption now, even tho you may not be selling your business for years to come. There are reasons for doing this, one of them is to defend against the possibility that capital gains exemption may someday be done away with.
• Unfortunately in this case, for anybody who has already crystalized before the new budget goes into effect, they’re stuck at the old $500K level and will miss out on the extra $250K.

But for anybody who hasn’t crystalized, and perhaps hasn’t even incorporated, it gives you food for thought. If you ever plan to build your self-employment operations into a self-generating business concern that you may want to sell someday, you can incorporate your sole proprietorship or partnership into a corporation in a tax friendly manner using something called a “Section B Rollover”, your lawyer should know the details.

If you’re married, you should think about having your spouse holding some of the shares. That way if you get an offer you’re prepared to accept down the road, you can each use your lifetime capital gains exemption, which under the current rules would give you the first 1.5 million tax free, a nice base to a retirement nest egg.

Mark Jeftovic has been a self-employed internet professional since 1994, currently he is the founder and president of easyDNS Technologies Inc., the DNS hosting company and domain registrar. His personal blog is at http://mark.jeftovic.net