Maroof HS CPA Professional Corporation, Toronto

Qualified Small Business Corporation Shares (QSBC)

Qualified Small Business Corporation Shares (QSBC)

Qualified Small Business Corporation Shares (QSBC)

QSBC allows its shareholders to claim Lifetime Capital Gain Exemption on the disposition of its shares.

Qualified Small Business Corporation QSBC Shares

Lifetime Capital Gains Exemption in CanadaThe Lifetime Capital Gain Exemption (LTCG) is a very lucrative deduction available to Canadian taxpayers. In 2021, you can deduct up to $892,218 from capital gains when you dispose of Qualified Small Business Corporation (QSBC) Shares. There is even an enhanced exemption available for Qualified Farm and Fishing Property (QFFP). However, in this post, we are going to limit the discussion to QSBC shares only.

Important disclaimer: The rules surrounding QSBC shares are complex. This post is for general reading purposes only and the readers must exercise caution while making any decision. At no point of time this post can be considered as tax advice. Readers must seek formal tax advice from their professional corporate tax accountant or personal tax advisers to avoid any adverse tax consequences. 

Read Lifetime Capital Gain Exemption in Canada.


Definition of QSBC Share

Section 110.6(1) of the Income Tax Act provides the definition of Qualified Small Business Corporation Share. Many taxpayers find the rules to determine the status of QSBC shares quite complex.

Read Section 110.6(1) of ITA here.

There are three tests to determine if a share is a QSBC share eligible for LCGE:

  1. The determination time test
  2. 90% or more asset test
  3. 50% or more asset test

The Determination Time Test & Holding Period

At the time of disposition, the corporation must be a small business corporation (SBC) and the share must be owned by the individual, spouse, or a person or partnership related to the individual. The holding period of this share is 24 months preceding the disposition. “The determination time” is the time of disposition.

A small business corporation (SBC), as per subsection 248(1) be a Canadian Controlled Private Corporation (CCPC).

In 24 months preceding the determination time, no one other than the individual, spouse, or person or partnership related to the individual owns that share. Section 110.6(14) further provides the rules related to the related persons for the qualification of QSBC shares. Subsection 110.6(14) deals with rules related to “related persons”.

Special rules provided in Subsection 110.6(14) may help the shareholders of newly incorporated small businesses to take advantage of LCGE. In such a case, all or substantially all the business assets are transferred in at incorporation.

90% or more Asset Test

At the time of disposition, the business must be a Small Business Corporation (SBC). Subsection 248(1) of ITA defines the SBC in detail and sets out a 90% or more asset test.

  1. All or substantially all the assets (at fair market value) of the corporation should be used in active business, carried out primarily in Canada, of that corporation or a related corporation.
  2. Such a small business corporation can have assets as shares (or indebtedness) of one more or connected small business corporation. A Connected corporation for this purpose is the one within the meaning of subsection 186(4) and is a  payor corporation in reference to that subsection.

What does all or substantially all mean?

Canada Revenue Agency (CRA) takes the position that all or substantially all means 90% or more, however, each case must be considered based on its facts. CRA also interpreted the word primarily as 50% or more.

A Personal Services Business and a Specified Investment Business do not qualify as QSBC since their assets are not used in active business.

Further, if there is a partnership interest as an asset, one must look through the relevant partnership assets.

This is important to mention here not to confuse s.39(1)(c) 12 months grace period for ABIL purposes is not applicable for LCGE deduction purposes.

50% or more Asset Test

As mentioned above, an SBC must have its assets primarily used for active business in Canada, throughout the 24 months period prior to disposition.

And we know, primarily means 50% or more. The small corporations with foreign operations such as foreign branches or foreign subsidiaries often do not qualify as SBCs, hence, no QSBC qualification.

If the assets of the corporation are shares of connected corporations, the 50% test is met if:

  1. The connected corporation is a CCPC and that CCPC uses 50% or more of its assets in active business, primarily carried out in Canada, and
  2. the shares or debt of the connected corporation were not held by anyone other than specified related parties throughout the holding period.

A holding corporation can be a small business corporation if it meets the requirements set out in subsections 248(1) and 186(4), hence, a  QSBC.

QSBC Examples in Case Law

2015_TCC_297 > Durocher v. The Queen The shares were not QSBC Shares for not meeting the 50% and more test.

2015_TCC_130 – Pellerin Vs The Queen 2015 The 24 months holding period requirement was met even when the taxpayer was less than 24 months old. (Beneficiary of a personal trust).

The rules surrounding LCGE and QSBC are complex! Maroof HS CPA Professional Corporation is a Toronto-based CPA firm providing income tax services in Ontario and Alberta. Get in touch with us today!



Maroof Hussain Sabri

Maroof Hussain Sabri

Maroof is a CPA, CA in the province of Ontario and Alberta in Canada. He is also a licensed CPA from North Dakota in the United States. He lives in Toronto.

Leave a Comment

Your email address will not be published.


Need Help?

If you have a generic question, you can submit a comment at the end of this post. If you’d like a formal consultation or advice, getting a quote is very simple!


Get in touch!

If you need our services, you can get in touch and experience for yourself why we are Toronto's favourite accounting firm.

Contact NowQuote Request
Scroll to Top