Crystallisation means deliberately triggering a capital gain now — usually by electing to transfer qualifying shares into a holding company under section 85(1) of the Income Tax Act — so a founder locks in the lifetime capital gains exemption before the shares, the law, or the corporation’s asset mix takes it away.
Under a section 85(1) rollover, the transferor and the corporation jointly elect an amount that becomes both the deemed proceeds and the new shares’ cost — bumped up for any non-share consideration received, and capped at fair market value. Set the elected amount high enough and the transferor realises exactly the gain needed to use the lifetime capital gains exemption, receiving only shares of the new holding company — no cash actually changes hands, which is the point: the exemption is used without a real sale to a third party.
Sequencing matters in a fund transaction. Where a founder is rolling part of their stake into the acquisition vehicle alongside the sponsor and cashing out the rest, crystallising the exemption on the cashed-out slice first — before that slice is sold to the fund’s newco — preserves it; sell first and elect later, and the exemption may already be gone. It is also worth flagging next to alternative minimum tax: triggering a large gain in one tax year, even a rollover gain with no cash proceeds, can itself push the founder into minimum tax that year.
A founder holds QSBC shares with a $50,000 adjusted cost base and a $675,000 fair market value. They elect, under section 85(1), to transfer the shares to a new holding company for an elected amount of $675,000, receiving only newco preferred shares as consideration. The realised gain is $675,000 − $50,000 = $625,000; at the one-half inclusion rate, the taxable gain is $312,500 — comfortably inside the $625,000 taxable-gain cap on the exemption, so the entire gain is sheltered and no cash tax is owed on the transfer itself.
See also: Lifetime capital gains exemption · Alternative minimum tax · Estate freeze.
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