Can I still qualify for the capital gains exemption if my corporation has a lot of cash sitting in the bank?

The size of your corporation's retained earnings, as an accounting figure, isn't itself what the exemption test looks at — what matters is what those retained profits are actually invested in today. If your corporation reinvested its earnings back into the active business — equipment, inventory, accounts receivable, working capital genuinely used to run operations — that generally supports qualification rather than undermining it. It's specifically when retained earnings end up sitting as cash, near-cash, or a passive investment portfolio, rather than being deployed in the business, that the corporation's asset mix starts to count against the active-use test the exemption depends on.

This distinction trips people up because "we've built up a lot of retained earnings" and "we're sitting on a lot of cash" often get treated as the same thing, when for this purpose they aren't: a highly profitable business that keeps reinvesting can have large retained earnings and still qualify comfortably, while a much smaller business that's simply accumulated idle cash can have a real qualification problem.

Having an accountant map out exactly what your retained earnings are currently invested in, well before a sale, tells you whether purification is actually needed or whether your existing reinvestment pattern already keeps you well within the qualifying range.