Can I lose my capital gains exemption just by holding too much cash in my company before selling?

Yes, this is a real and common way otherwise-qualifying shares can lose access to the exemption. Qualification depends on the corporation's assets being substantially used in an active business in Canada, and cash sitting in the company beyond what the business genuinely needs for its operations is generally treated as a passive, non-active asset for this test, even though it came from the business's own profits.

Many owners build up retained cash over the years as a cushion or for future investment, without thinking about how it affects share qualification down the road, and then discover the issue only once a sale is actually being planned, at which point fixing it takes real lead time. "Purification" is the general term for cleaning up non-active assets like excess cash before a sale, often by paying it out as dividends, using it to pay down debt, or moving it into a separate holding company, so the shares being sold pass the active-asset test.

Because these tests look at the corporation's asset mix over a period of time, not just the moment of the sale, this kind of planning genuinely needs to start well before you're negotiating with a buyer, ideally as part of ongoing tax planning rather than a last-minute scramble.