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Liquidating a company capital gains

If you enter a sell order using your brokerage account, you enter the number of shares for each stock you want to liquidate.

However this exemption does not apply to capital gains arising in transactions with associated persons, except in limited circumstances where the associated person capital gain arises in the course of the liquidation of a close company (and the associated person is not a company).

These gains are commonly referred to as “tainted capital gains”. Mum and dad operate a successful business through a company owned by them.

This means that the distribution of the $500,000 capital gain will not be taxable to mum and dad.

The proposed changes are to take effect from the date of enactment and apply to distributions made on or after that date.

As a result the rules effectively apply retrospectively, i.e.

if a company is currently sitting on a tainted capital gain, it may be distributed tax free on liquidation after that date (unless the transaction was with an 85% or more commonly owned company and the two companies are still 85% or more commonly owned).

Further the situation was aggravated when the somewhat narrow definition of “related person” was replaced with the extensive definition of “associated person” meaning far more transactions were caught by the rules.

Finally, the over reach of the tax rules relating to capital gains has been recognised, with the “tainting” being removed from almost all transactions.

A Bill proposes a wide range of changes to the tainted capital gain rules.

Inland Revenue is to be commended for driving this change.

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