Careers
Contact Us
Treatment of Qualified Small Business Stock (“QSBS”) is a prized tool for founders to raise capital and for early investors to utilize in building equity that can be practically tax free on disposition. Given that one of President Trump’s motivations for his One Big Beautiful Bill (“OBBB”) is to stimulate US start-up investment, it is not surprising that another key component of the OBBB is the expansion of eligibility for QSBS treatment.
While this component of the OBBB will have a significant positive impact for US domestic corporations and US based early investors, will it make any difference for Canadians?
In general, QSBS is stock both issued directly by a US domestic C corporation and purchased by a noncorporate taxpayer (individual or trust) at a time when such corporation is considered to be a small corporation relative to the QSBS rules, as will be explained. Prior to the OBBB, if an original investor sells such stock after a holding period of five years, the gain would be 100% exempt from federal tax.
The OBBB has expanded the rules and definitions as follows, allowing more companies to issue stock as QSBS, and more investors to take advantage of the significant tax savings.
- Prior to the OBBB, a company would be considered a small business as long as its gross assets did not exceed $50 million. The OBBB increased the threshold to $75 million, bringing in more companies under the definition of a qualified small business for QSBS treatment.
- Prior to the OBBB, an investor had to hold such stock for at least five years before being eligible for 100% exclusion from federal tax. Now, an investor can dispose of QSBS after three or four years to enjoy partial exclusion and lower tax rates on the gain (50% and 75% exclusions respectively).
- Prior to the OBBB, an investor would have a gain exclusion limit of the greater of $10 million or 10 times the basis in the stock sold. The OBBB increased the $10 million ceiling to $15 million.
While these rule changes will provide US based early investors with expanded US tax savings in tax free or partially tax free dispositions, Canadian investors will still be subject to Canadian tax at their applicable Canadian tax rates. This is because under the Canada-US Income Tax Treaty, capital gains from stock dispositions are taxed only in the country where the taxpayer legally resides. However, Canadian investors should still keep track of the domicile of their investments in case they establish US residency in the future, thereby being subject to US tax. At that point they can dispose of their QSBS tax free or partially tax free, depending on their holding period as discuss above.
Here at Zeifmans we can help you navigate this new landscape. If you have any questions with regards to your stock holdings, or whether your company qualifies for QSBS treatment, please reach out to Howard Blumenfeld at (647)-256-7733 or email at hb@zeifmans.ca.
