David, a sole proprietor, is planning to incorporate his business. He wants to ensure that if he sells his shares in the future, they will qualify for the Lifetime Capital Gains Exemption. What is a key step he should take regarding the assets he transfers to the new corporation?

Question: David, a sole proprietor, is planning to incorporate his business. He wants to ensure that if he sells his shares in the future, they will qualify for the Lifetime Capital Gains Exemption. What is a key step he should take regarding the assets he transfers to the new corporation?

Answer options:

• Ensure all assets transferred are passive investments to minimize future tax liabilities.
• Transfer only cash to the corporation to simplify future asset tracking. ✅ Ensure that the fair market value of active business assets exceeds 90% of the fair market value of all corporate assets immediately before the business sale.
• Maintain less than 50% of the company's assets in active business use for at least 24 months.

Correct answer: Ensure that the fair market value of active business assets exceeds 90% of the fair market value of all corporate assets immediately before the business sale.

Explanation: To qualify for the LCGE, one crucial condition is that immediately before the disposition of the shares, substantially all (meaning more than 90%) of the fair market value of the corporation's assets must be used in an active business carried on primarily in Canada.