How do I check whether a client's shares are qualified small business corporation shares?
A client's shares are QSBC shares in 2026, eligible for the $1,275,000 exemption, only if they pass three tests. At the sale, the CCPC has 90% or more of its asset value in active business assets. For the 24 months before, only your client or a related person owned them, and over 50% of asset value stayed active.
Which three tests must a QSBC share pass?
The definition of qualified small business corporation share in s.110.6(1) tests the share at the determination time, which for a sale is the moment of disposition, and then looks back 24 months laws-lois.justice.gc.ca. All three tests have to pass.
| Test | When it is measured | What has to be true | ITA |
|---|---|---|---|
| Small business corporation | At the sale | The corporation is a CCPC and all or substantially all (90% or more) of the fair market value of its assets is used principally in an active business carried on primarily in Canada, or is shares or debt of connected small business corporations | s.110.6(1)(a), s.248(1) |
| Owner at the sale | At the sale | The share is owned by your client, your client's spouse or common law partner, or a partnership related to your client | s.110.6(1)(a) |
| Holding period | The 24 months before the sale | Nobody other than your client or a person or partnership related to your client owned the share | s.110.6(1)(b) |
| Asset test | Throughout that part of the 24 months your client or a related person owned it | The corporation was a CCPC and more than 50% of the fair market value of its assets was active business assets, or qualifying shares or debt of connected corporations | s.110.6(1)(c) |
The 90% is the CRA's reading of "all or substantially all", spelled out in its small business corporation definition canada.ca. The statute's version in s.248(1) also counts assets used in an active business carried on by a related corporation, not only by the corporation itself
laws-lois.justice.gc.ca. Active business means any business other than a specified investment business or a personal services business
laws-lois.justice.gc.ca. For the CCPC half of each test, see CCPC definition.
Passing all three lets your client claim the capital gains deduction on line 25400, provided they were resident in Canada throughout the year laws-lois.justice.gc.ca. Finance Canada's September 15, 2026 release puts the lifetime limit at $1.275 million
canada.ca: $1,275,000 of gain, a $637,500 deduction at the one half inclusion rate. The full limit and how CNIL cuts into it are on the lifetime capital gains exemption 2026 page.
Worked example: can purification get Opco to 90% before the sale?
Your client owns all the shares of Opco and has agreed to sell them. At fair market value, Opco holds $1,400,000 of assets used in its business and $600,000 of surplus cash and a portfolio the business doesn't use. A year ago the split was about the same.
| Step | Before | After moving out $450,000 |
|---|---|---|
| Active business assets | $1,400,000 | $1,400,000 |
| Passive assets | $600,000 | $150,000 |
| Total fair market value | $2,000,000 | $1,550,000 |
| Active share of value | 70% | 90.3% |
| 50% test over 24 months | Passes | Passes |
| 90% test at the sale | Fails | Passes |
The 90% ceiling on passive assets solves to $1,400,000 times 10/90, or $155,556. So at least $444,444 of passive assets has to leave before closing; moving $450,000 leaves a small cushion for valuation differences.
Timing is the whole game. Purification fixes the 90% test, which only looks at the moment of sale. It can't repair the 50% test: if passive assets ever passed 50% of value during the 24 months, the shares fail and only time cures it. If the passive assets go out as a dividend to a corporate shareholder, check subsection 55(2). A dividend that significantly reduces the capital gain on a share and exceeds the safe income attributable to it is treated as proceeds or a capital gain instead laws-lois.justice.gc.ca. Our safe income page covers that calculation.
Who counts as related for the 24 month holding test?
Related has its s.251 meaning. Individuals are related when connected by blood, marriage, common law partnership or adoption laws-lois.justice.gc.ca. Blood means a child or other descendant, or a brother or sister, and marriage extends it to in laws such as a spouse's sibling
laws-lois.justice.gc.ca.
| Prior owner in the 24 months | Related to your client? | Holding test |
|---|---|---|
| Parent, child, grandchild | Yes | Passes |
| Brother or sister | Yes | Passes |
| Spouse, or spouse's brother or sister | Yes | Passes |
| Uncle, aunt, niece, nephew | No | Fails until 24 months pass |
| Cousin | No | Fails until 24 months pass |
| Arm's length investor | No | Fails until 24 months pass |
The uncle and niece rows catch family business transfers all the time: a nephew who buys his uncle's shares starts a fresh 24 month clock. Subsection 110.6(14) adds deeming rules. A personal trust is related to a person while that person is a beneficiary, a partnership is related to its members, and a corporation that buys shares from a person is related to that seller when substantially all of the price is its own common shares laws-lois.justice.gc.ca. Identical shares are treated as sold in the order acquired, so a recent purchase from an unrelated seller isn't hidden by an older block.
How do holding companies tighten the asset tests?
Shares or debt of a connected corporation (connected within the meaning of s.186(4)) count as good assets for the 50% test only if they weren't owned by an unrelated person before the holding company acquired them, and the connected corporation itself kept more than 50% of its value in active assets while held laws-lois.justice.gc.ca.
Paragraph (d) of the definition is the trap. If, for any period in the 24 months, a corporation in the chain doesn't have all or substantially all of its value in qualifying assets, the 50% test for the other connected corporations becomes all or substantially all for that period laws-lois.justice.gc.ca. In practice, a holding company with idle cash pushes the operating company up to a 90% test for every period in the lookback that the cash sits there. Our holding company page covers when the structure is worth it.
Corporate owned life insurance has its own valuation rule. When a policy on a shareholder's life is held by the corporation or a connected corporation, its fair market value is deemed to be its cash surrender value immediately before death laws-lois.justice.gc.ca.
What else can deny the exemption on a QSBC sale?
A share can pass all three tests and still lose the deduction under the anti avoidance rules in s.110.6 laws-lois.justice.gc.ca:
| Rule | What triggers it |
|---|---|
| s.110.6(7)(a) | The sale is part of a series that includes an intercorporate dividend that would fall under s.55(2) but for paragraph 55(3)(b) |
| s.110.6(7)(b) | In the series, a corporation or partnership acquires property for significantly less than its fair market value |
| s.110.6(8) | A significant part of the gain can reasonably be attributed to dividends not paid, or paid below 90% of the average annual rate of return on the share (prescribed shares excepted) |
| s.110.6(6) | Your client knowingly, or through gross negligence, didn't report the gain or filed more than a year late, and the CRA proves it |
On the other side, a signed purchase agreement doesn't break CCPC status for these tests. For deciding whether the corporation is a small business corporation or a CCPC, s.110.6(14)(b) ignores rights under a share purchase and sale agreement, so a foreign or public buyer's contract doesn't count as control under s.251(5)(b) before closing laws-lois.justice.gc.ca. If the buyer is your client's own holding company, read section 84.1 before you plan on the exemption.
Sources
Do newly issued treasury shares qualify right away?
No. Shares issued after June 13, 1988 are deemed owned by an unrelated person just before they were issued, so the 24 month clock starts at issue. The exceptions are shares issued for other shares, as a stock dividend, or on a transfer of all or substantially all of the assets of an active business laws-lois.justice.gc.ca.
What if my client dies holding the shares?
The 90% test gets a 12 month grace period. If the share would be a QSBC share immediately before death except for the test at the determination time, it still qualifies when it was a QSBC share at any time in the 12 months before death laws-lois.justice.gc.ca. The holding period and 50% tests still apply.
Where does a QSBC share sale go on the return?
On Schedule 3, proceeds go on line 10699 and the gain or loss on line 10700 canada.ca. Form T657 computes the deduction for line 25400, and Form T936 is needed if your client had investment income or expenses in any year from 1988 on
canada.ca. See Schedule 3 for the rest of the form.
Can my client defer the gain and still use the exemption?
No. A gain your client elects to defer under the small business investment rollover isn't reported as a QSBC disposition on Schedule 3, so it doesn't reach the deduction canada.ca.
General information for the tax year shown, not advice for a specific client. Confirm the facts before you file or remit.