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A qualified small business corporation (QSBC) isn’t a type of company you register. It’s a test your shares have to pass on the day you sell them, and passing it can shelter up to $1,250,000 of capital gain from tax for sales after June 24, 2024, through the lifetime capital gains exemption.
What makes a corporation a qualified small business corporation?
The Income Tax Act sets the rules in section 110.6. The corporation has to be a Canadian-controlled private corporation, and the shares have to pass an ownership test and an asset test.
The ownership test is simple to say. Here’s how the Act puts it:
throughout the 24 months immediately preceding the determination time, was not owned by anyone other than the individual or a person or partnership related to the individual
Income Tax Act, section 110.6(1), “qualified small business corporation share”, Justice Laws website
The asset test looks at what the company holds. Over that same stretch, more than 50% of the fair market value of its assets has to be tied to an active business carried on mainly in Canada, or to shares and debt of connected companies that meet similar tests. At the moment of sale the bar is higher, and it’s commonly described as 90% of assets. We haven’t checked that figure against an official page, so read the Act’s wording or ask an accountant before you lean on it.
How much can the exemption save you?
The limit is $1,250,000 per person, for life, on the gain from selling QSBC shares. The CRA’s page on the capital gains deduction gives that figure and says you work out your claim on Form T657. Indexing resumes in 2026, and a Department of Finance release dated 15 September 2026 lists the limit at $1.275 million. That release doesn’t give an effective date, so confirm the number with the CRA before a sale.
| Item | Figure |
|---|---|
| Lifetime exemption, sales after June 24, 2024 | $1,250,000 |
| 2026 figure after indexing (Finance release, effective date not stated) | about ,275,000 |
| Capital gains inclusion rate | 50% (inferred, see below) |
| Ownership test before sale | 24 months |
| Asset test over that period | More than 50% active business assets |
No single CRA page we read prints the 50% inclusion rate in one line. It follows from the planned increase to two-thirds having been cancelled, which the CRA states, so 50% is our best reading.
What does a sale look like in numbers?
Say Dana owns a small manufacturing company in Moncton and sells her shares for a gain of $1,500,000. The shares qualify. The exemption at $1,250,000 removes most of it, which leaves a $250,000 gain. Half of that, $125,000, is added to her income. Her tax on that slice depends on her other income and her province, so run it through the capital gains tax calculator instead of guessing.
Now the same $1,500,000 gain when the shares don’t qualify. All of it is an ordinary capital gain, and $750,000 of it is taxable. The gap is the exemption times her marginal rate, which can run to six figures. It’s why owners think about this test years before a sale, not the month before.
That assumes Dana hasn’t used any of her exemption on earlier sales. If she has, the room left is smaller, so a ballpark from this page is only a starting point.
Why do companies fail the test?
Usually because of cash. A corporation that lets profit pile up in investments, or holds a rental property or a fat bank balance, can slip under the asset threshold. Owners sometimes fix this shortly before a sale by paying money out as dividends. That can trigger tax of its own, and the dividend tax calculator shows how much. Related-party shares are another trap. If someone unrelated held the shares at any point in the past 24 months, the clock restarts.
Holding companies deserve a warning. Shares held through a chain of companies can qualify, but the rules get technical fast. This is one of the few situations where paying a tax accountant makes sense, ideally before you restructure anything.
Does the small business rate have anything to do with it?
They share a name and little else. The small business rate is about the tax your corporation pays on its own profit each year, 9% federal on the first $500,000 for a CCPC. The corporate tax calculator works that out. The QSBC test is about you, the shareholder, selling shares. A company can enjoy the low rate and still fail the share test, and the reverse is true too.
Can your spouse hold some of the shares?
Often, yes. The Act lets the shares be owned by you, your spouse or common-law partner, or a partnership related to you at the time of sale, and the 24-month rule allows related persons to have held them earlier. What it doesn’t allow is an outsider holding them during that window. If you plan to move shares around the family, ask an accountant first, because the timing matters more than the intent.
Where the figures come from
The share definition is from section 110.6 of the Income Tax Act on the Justice Laws website. The exemption amount comes from Canada Revenue Agency material on the capital gains deduction. We’re an independent information site, not affiliated with the CRA or any government body.
Frequently asked questions
What is a qualified small business corporation?
It is a Canadian-controlled private corporation whose shares pass ownership and asset tests in the Income Tax Act. Passing them lets the seller claim the lifetime capital gains exemption.
How much is the lifetime capital gains exemption?
$1,250,000 for sales after June 24, 2024. A figure of $1,275,000 for 2026 appears in indexation material, but we rate it medium confidence.
Can I register as a qualified small business corporation?
No. It's a status your shares have or don't have when you sell them.
Does the exemption apply to a rental property company?
Usually not. The company needs to use its assets mainly in an active business, and rental holdings can fail that test.
Do I report the sale even if the gain is exempt?
Yes, a sale of shares goes on your tax return. Check the CRA guide for the form you need.
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