Sell shares in a qualifying small business corporation and you can shelter up to $1,275,000 of the gain in 2026. It applies to shares, not to an asset sale, and the company must have qualified for the two years before closing. Plan it two years out, not two weeks.
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Section 110.6 of the Income Tax Act gives every Canadian resident individual a lifetime allowance of exempt capital gains on qualified small business corporation shares. The limit was raised to $1.25 million for dispositions after 24 June 2024, and with indexation resumed it stands at $1,275,000 for 2026. Qualified farm or fishing property has its own, higher limit.
It is a lifetime figure, not an annual one, and it is shared across every disposition you make. Using part of it on one sale leaves the balance available for the next.
The Canadian Entrepreneurs' Incentive, which would have layered a reduced inclusion rate on top of the exemption, was announced in 2024 and cancelled in Budget 2025. It is not available. Neither is the proposed increase to the capital gains inclusion rate, which the government abandoned in March 2025.
At the moment of sale, at least 90% of the fair market value of the corporation's assets must be used principally in an active business carried on primarily in Canada, or consist of shares or debt of connected small business corporations.
Throughout the 24 months before the sale, more than 50% of the fair market value of the assets must have been used that way. And throughout those same 24 months the shares must not have been owned by anyone other than you or a person related to you.
The 90% test is where most owner-managed companies fail, because successful companies accumulate cash, GICs and investments that are not used in the business. Cleaning that up is called purification: paying out excess cash as dividends, moving investments to a holding corporation, or buying genuine business assets. Some steps work immediately; others need to be done well before the 24-month window opens.
The exemption belongs to individuals, so a spouse and adult children who own qualifying shares each have their own. That multiplication is usually achieved through a family trust holding the shares, with gains allocated out to beneficiaries on a sale. It works, but the tax on split income rules constrain who can receive what, and the structure and the shareholdings must be in place long before a buyer appears.
Two things shrink the amount you can claim. A cumulative net investment loss, built up from years where investment expenses exceeded investment income, reduces your available exemption. So does any allowable business investment loss you claimed in an earlier year.
Alternative minimum tax is the other surprise. Since the 2024 changes, claiming a large exemption can trigger AMT in the year of sale even though the gain is exempt from regular tax. AMT is generally recoverable against regular tax in later years, but it is real cash leaving your account at closing. Model it before you sign anything.
The exemption only applies on a share sale. Buyers usually prefer to buy assets: they get a fresh cost base to depreciate and they leave your corporation's history — tax, employment, litigation — behind with you. Price is where that gets resolved, and a seller who knows the size of their exemption knows exactly how much of a discount on an asset deal they can absorb before it costs them money.
Hybrid structures exist that give the buyer a stepped-up basis on some assets while preserving share sale treatment for the rest. They are fact-specific, they change the tax outcome for both sides, and they have to be built into the letter of intent rather than bolted on two weeks before closing.
No. The exemption applies to a disposition of shares of a qualified small business corporation. An asset sale produces gains inside the corporation, and a corporation has no lifetime exemption. The after-tax difference between the two structures is frequently the largest single number in the whole transaction.
The asset tests look back 24 months from the sale, which is your practical planning horizon. If the balance sheet is not clean two years before closing, some purification routes are already unavailable to you. Owners who start when the buyer calls are usually too late to fix a 50% test problem.
Yes, if they genuinely own qualifying shares — typically through a family trust established well in advance. But the tax on split income rules can push amounts allocated to family members to the top rate unless an exclusion applies, and each beneficiary must have their own exemption available. This needs to be designed years ahead, not improvised during a sale.
Not necessarily. The exemption removes the gain from regular tax, but alternative minimum tax can apply in the year of sale, and a cumulative net investment loss can reduce the amount you are permitted to claim. Run both calculations before you agree a closing date, so the cash is there when it is needed.
Open your file tonight — a licensed Ontario lawyer will confirm everything with you by tomorrow.