Qualified Small Business Corporation (QSBC) Shares

A qualified small business corporation share is a share that passes the tests in the definition in subsection 110.6(1) of the Income Tax Act. The label matters for one reason: a capital gain on a QSBC share sold by an individual can be sheltered by the lifetime capital gains exemption, up to $1,275,000 of gains for 2026. A share that fails any test produces an ordinary taxable gain.

QSBC status is tested at a specific moment, the determination time, which is normally the moment of sale, and over the 24 months before it. It belongs to the share in the hands of a particular owner, so the same company's shares can qualify for one shareholder and not another. Shares of a holding company can also qualify when the holding company's value comes from shares or debt of connected operating companies that themselves pass the tests.

There is no registration or certificate. The seller self-assesses, claims the exemption on Form T657, and the CRA can review the claim later, so the evidence has to be assembled before the sale closes.

Every test must be met. The first comes from the definition of small business corporation in subsection 248(1); the other two come from the QSBC definition itself.

At the time of sale. The company must be a Canadian-controlled private corporation, and the shares must be owned by the seller, the seller's spouse or common-law partner, or a partnership related to the seller. The CRA's capital gains guide, T4037, reads "all or substantially all" as 90% or more.

During the 24 months. The more-than-50% test must be met throughout the period, not on average. Any stretch in which passive assets made up half or more of the total can disqualify a sale at any point in the following two years.

Most failed claims are not about ownership. They are about what a successful company accumulates. Assets count against the tests when they are not used principally in the active business: surplus cash beyond working-capital needs, GICs and investment portfolios, real estate rented to third parties, and loans to shareholders or outsiders.

Three features of the measurement catch owners out:

• It uses the fair market value of total assets, not book value, so internally generated goodwill that never appears on the balance sheet generally counts as an active asset and often helps.
• Debts are not netted against assets; a company holding $1 million of investments still holds them even if it also owes the bank $1 million.
• In a chain of corporations, stricter look-through rules apply. Where a corporation in the chain falls below 90% in active assets and qualifying holdings at any point in the 24 months, each connected corporation beneath it must meet the 90% standard, not just 50%, for that period.

Purification is the general name for removing passive assets before the tests are measured, for example by paying out surplus cash, putting it to work in the business, or reorganizing investments into a sister corporation. Purification can fix the 90% test at the time of sale; it cannot repair a 24-month period in which passive assets already made up half or more of the total. Each method has its own tax traps and is planned with an accountant.

The holding period test has a rule that surprises founders and families. Under subsection 110.6(14), shares issued from treasury are deemed to have been owned by an unrelated person immediately before they were issued. A newly issued share therefore starts its own 24-month clock, unless it was issued:

1. As consideration for other shares, as in a share exchange or reorganization.
2. As part of a transfer to the corporation of all or substantially all the assets used in an active business, as when a sole proprietor rolls the business into a new company under a section 85 rollover.
3. As payment of a stock dividend.

This matters in an estate freeze. The founder's frozen preferred shares, issued in exchange for common shares, keep their history. The new common shares issued to children or a family trust are fresh treasury shares, so they generally need 24 months before a sale for the family members to claim their own exemptions.

CCPC status must also hold throughout. If a non-resident or public company acquires control, or acquires rights that are treated as control, the shares can stop qualifying. For this test, subsection 110.6(14) ignores rights under the agreement to buy the shares themselves, so signing a purchase agreement with a foreign buyer does not by itself end CCPC status. Owners expecting a foreign investor often crystallize the exemption first.

Because the tests look back two years, the review should start when a sale is first contemplated, not when a letter of intent arrives. A practical review covers:

• Month-end balance sheets for the past 24 months, restated at fair market value where goodwill or real estate is material.
• The share register and minute book, to confirm who has owned each share and when it was issued.
• Any change in control, investor rights or options that could have affected CCPC status.
• Prior exemption claims and any cumulative net investment loss for each shareholder.

Lamba Law's free sale readiness checker asks whether this review has been done and explains why the 24-month look-back means starting early. If the shares will not qualify, the tax case for a share sale weakens, which changes the asset purchase vs. share purchase negotiation and the price a seller should accept.

Sofia Marchetti owns all the shares of Marchetti Millwork Inc., a Vaughan cabinetry manufacturer she incorporated in 2011. In early 2026, a buyer offers $4,200,000 for her shares. A pre-sale review values the company's assets at $4,300,000: $3,300,000 of equipment, receivables, inventory and goodwill, and a $1,000,000 investment portfolio built from retained profits.

Active assets are about 77% of the total, so the shares fail the 90% test at the time of sale. The 24-month record is clean: the portfolio never exceeded about 25% of total assets, so the company always met the more-than-50% test, and Sofia has been the only shareholder.

Her accountant and lawyer carry out a pre-sale reorganization that moves the portfolio into a new sister corporation Sofia also owns. Because a sale to an unrelated buyer follows, the steps are planned around the anti-avoidance rule for inter-corporate dividends in section 55 of the Income Tax Act, which can treat part of an otherwise tax-free inter-corporate dividend as a capital gain. Her new Millwork shares are issued in exchange for her old ones, so the 24-month ownership clock does not restart. The buyer, which never wanted the portfolio, reduces its price to $3,200,000. At closing, Millwork's assets are almost entirely active, the shares qualify, and Sofia shelters $1,275,000 of her gain with the 2026 exemption while keeping the portfolio in her own company.