Qualified Small Business Corporation Share Tests in Ontario

If you own shares in a private company and are thinking of selling, you may have heard of the lifetime capital gains exemption. It can shelter a large part of the gain, but only if the shares are qualified small business corporation shares, often shortened to QSBC shares.

Whether your shares qualify depends on what the company owns and who has held the shares over the last two years. This article walks through the tests in plain language so you can see where problems usually appear.

Why qualifying matters

An individual who sells QSBC shares, or qualified farm or fishing property, may claim the capital gains deduction on line 25400 of the return.

For 2025 and for dispositions after June 24, 2024, the exemption is $1,250,000 of capital gains, which is a maximum deduction of $625,000 (50% of $1,250,000). The $625,000 amount is indexed to inflation for taxation years that begin after 2025, so confirm the current figure when you plan a sale.

The three tests

A share must meet all three tests. They look at different points in time, which is where many owners get caught.

Under the 90% test, the assets must be used mainly in an active business carried on primarily in Canada, be shares or debts of connected small business corporations, or be a combination of these. At the time of sale, the share must also be owned by you, your spouse or common-law partner, or a partnership you belonged to.

Exceptions that can change the answer

• Newly issued shares: shares a corporation issued after June 13, 1988 are deemed to have been owned by an unrelated person before they were issued, so the 24-month clock starts at issue. This does not apply to shares issued in exchange for other shares, for all or substantially all the assets of an active business, or as a stock dividend.
• Death: if a share would have qualified immediately before the owner died except for the 90% requirement, it is still treated as qualifying if it qualified at any time in the 12 months before death.
• Purchase and sale agreements: a right under a purchase and sale agreement for a share is not counted when deciding whether a corporation is a small business corporation or a Canadian-controlled private corporation, so signing with a non-resident or public buyer does not by itself end that status.
• Unpaid dividends: the deduction can be denied where a significant part of the gain can reasonably be attributed to dividends not being paid on a share, or being paid at less than 90% of the average annual rate of return.

Other limits on the deduction

Passing the share tests does not guarantee the full amount. Any deduction you claimed in earlier years reduces what is left. A cumulative net investment loss balance reduces the deduction, and it is the amount by which your total investment expenses since 1987 exceed your total investment income since 1987. An allowable business investment loss claimed for 2025 reduces the deduction for 2025 and future years.

Deferred gains, such as gains held back under a reserve, do not qualify for the deduction. Only an individual resident in Canada throughout the year can claim it, although someone resident at any time in the year is deemed resident throughout it if they were also resident throughout the year before or the year after.

What to do next

• List what the company owns and estimate the fair market value of each asset, separating active business assets from cash and investments.
• Trace who has owned each share class for the last 24 months, including any shares issued recently.
• Gather past returns to check prior exemption claims, investment income and expenses, and any business investment losses.
• Ask a lawyer or accountant to test the company against each requirement well before a sale closes.
• Expect to complete Form T657, and Form T936 if you had investment income or expenses in any year from 1988 to 2025.

Frequently asked questions