A company buying shares from its founder is a very common exit route for Canadian owner-managers, and it is one of the places the tax outcome differs most sharply from the intuition. Where a sale to a third-party buyer can produce a capital gain eligible for the lifetime capital gains exemption on qualified small business corporation shares, a redemption or repurchase by the corporation itself is caught by s.84(3), which deems the amount in excess of paid-up capital to be a dividend rather than a capital gain — generally outside the LCGE.

There are well-trodden planning routes around this (capital dividend account, safe income on hand, hybrid sale structures), but the route matters enormously and the wrong one is expensive. This is the clearest example in this edition of a mechanic you should not copy from a foreign filing without professional advice.