QSBC Share Eligibility and Purification Checker 2026
Cash and investments sitting in the operating company can disqualify your shares from the lifetime capital gains exemption entirely. Test the 90% asset test at the sale date and the 50% test across the preceding 24 months, see exactly how much has to come out, and find the earliest date your shares can qualify.
tax at stake
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The Three Tests
| Test | Requirement | Your Position | Result |
|---|
Your Balance Sheet, Split the Way the CRA Splits It
| Asset | Treatment | Active | Not Active |
|---|
Purification Options for the Amount That Must Come Out
| Option | How It Works | Tax Cost | Timing |
|---|
Points That Decide This Before the Percentages Do
What to Do Next
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Disclaimer: This checker applies the qualified small business corporation share definition in subsection 110.6(1) and the small business corporation definition in subsection 248(1), using the 2026 lifetime capital gains exemption of $1,275,000, a 50% capital gains inclusion rate and the top Ontario rate. Whether a particular asset is used principally in an active business is a question of fact, and the treatment of cash in particular depends on the genuine operating requirements of the business rather than a formula. Connected corporations, holding company structures and partnership interests are subject to additional look-through tests not modelled here. The alternative minimum tax, the tax on split income and the reasonableness of any trust allocation all affect whether the exemption is available in practice. This page is general information, not tax advice, and no share sale should be structured on it.
Three Tests, and Only Two Can Be Fixed Late
The lifetime capital gains exemption is worth $1,275,000 of sheltered gain per individual in 2026, which is roughly $341,000 of personal tax at the top Ontario rate. To claim it on a share sale, the shares have to be qualified small business corporation shares at the moment of disposition, and that means passing three separate tests.
| Test | Requirement | Can It Be Fixed Late |
|---|---|---|
| The 90% test | 90% or more of assets by fair market value used principally in an active business, at the moment of sale | Yes, up to the day of closing |
| The 50% test | More than 50% of assets so used, throughout the 24 months before the sale | No, it looks backwards |
| The holding period | Shares not owned by anyone other than you or a related person in those 24 months | No, you wait |
The 50% test is the one that ends deals. A corporation that has been sitting on a large investment portfolio for the last two years cannot fix it by paying a dividend the week before closing. The test asks what the balance sheet looked like throughout the 24 months, and no amount of purification changes history. The clock starts from the date the balance sheet is corrected.
The 90% Test at the Moment of Sale
At the moment of disposition, all or substantially all of the fair market value of the corporation’s assets must be used principally in an active business carried on primarily in Canada, or be shares or debt of connected small business corporations, or a combination of the two. The CRA reads all or substantially all as 90% or more.
This is a fair market value test, not a book value test. Goodwill counts and is frequently the largest active asset on the balance sheet, but it only appears at fair market value, not in the accounts. A corporation that looks offside on its financial statements can be onside once goodwill is valued, and the reverse is also true when appreciated real estate is not used in the business.
The 50% Test Over 24 Months
Throughout the 24 months immediately before the sale, more than 50% of the fair market value of the corporation’s assets must have been used principally in an active business carried on primarily in Canada. Throughout means at all times, not on average.
A single month where investments exceeded operating assets breaks the test for the whole period. In practice this catches businesses that sold a division, received an insurance settlement, or simply had a very profitable year and left the cash in place.
The Holding Period
For the 24 months before the sale, the shares must not have been owned by anyone other than you or a person or partnership related to you. Newly issued shares, shares recently acquired from an arm’s length party, and shares issued to a family trust last month all fail this test on their own, regardless of how clean the balance sheet is.
This is why family share structures have to be created years ahead. Adding a spouse or an adult child to the share register in the month before closing achieves nothing for the exemption and may itself trigger tax.
What Counts as an Active Business Asset
| Active | Not Active |
|---|---|
| Inventory | Excess cash and term deposits |
| Trade accounts receivable | Marketable securities and portfolio investments |
| Equipment and vehicles used in the business | Rental or investment real estate |
| Premises the business operates from | Shareholder loans receivable |
| Goodwill at fair market value | Cash surrender value of corporate life insurance |
| Prepaid business expenses | Loans to related parties not used in an active business |
| Cash genuinely required as working capital | Vacant land held for appreciation |
Cash Is the Grey Area
Cash required to meet the ordinary operating needs of the business is an active asset. Cash accumulated beyond those needs is not. There is no statutory percentage, and the CRA looks at what the business genuinely requires: the operating cycle, seasonal swings, payroll obligations, committed capital expenditure and any bank covenant requiring a minimum balance.
A general contractor with bonding requirements can justify a far larger balance than a consultancy with monthly billing. What matters is that the requirement is documented and defensible before the sale rather than argued afterwards.
Document the working capital requirement while the business is operating. A cash flow analysis prepared two years before closing, showing why the balance is needed, is evidence. The same analysis prepared after the CRA queries the claim is advocacy. The difference in how it is received is substantial.
Purification Options
| Option | How It Works | Tax Cost |
|---|---|---|
| Dividend to a holding company | Surplus paid up as an intercorporate dividend under section 112 | Generally nil, subject to safe income |
| Pay down corporate debt | Cash applied against loans, reducing both sides | Nil |
| Dividend or bonus to shareholders | Surplus paid out personally | Full personal tax on the amount |
| Buy active business assets | Cash converted into equipment or premises used in the business | Nil, if the purchase is genuine |
| Transfer non-active assets out | Section 85 rollover to a sister corporation | Deferred, but needs planning |
| Redeem shares | Corporation buys back shares for cash | Deemed dividend on the redemption |
Life Insurance Is a Trap
Corporate-owned permanent life insurance is frequently recommended as a way to shelter surplus from the passive income rules, and it does help there. What is rarely mentioned in the same conversation is that the cash surrender value is not an active business asset, so it counts against both the 90% test and the 50% test.
A policy funded heavily over ten years can quietly build a cash surrender value large enough to disqualify the shares. Because a policy cannot be moved to a holding company without tax consequences, this is one of the harder purification problems to solve at short notice.
Safe Income When Purifying
Moving surplus to a holding company by dividend is generally tax free between connected corporations, but subsection 55(2) can recharacterise the dividend as a capital gain where it exceeds the safe income on hand attributable to the shares and one of the purposes was to reduce a capital gain.
A large purification dividend immediately before a share sale is precisely the fact pattern that subsection is aimed at. Regular annual sweeps of accumulated after-tax earnings, started years before an exit, are both safer and more effective.
What This Checker Does Not Cover
- Connected corporation look-through rules, where the operating company holds shares of other corporations
- The alternative minimum tax, which can apply on a large exempt gain
- Trust allocations and whether an allocation to a beneficiary is reasonable and effective
- Whether the business is carried on primarily in Canada, which is a separate factual test
- Share sale against asset sale, which is a negotiation as much as a tax question
- Provincial variations outside Ontario in the tax saved
Two years ahead is the right time to look at this. The 90% test can be fixed the week before closing, but the 50% test and the holding period cannot. Testing the balance sheet now, and correcting it now, is what makes the exemption available when the offer arrives. Our capital gains planning service covers the asset review, the purification plan and the share structure.
Frequently Asked Questions
Common questions from owners preparing a business for sale.
Related Calculators and Guides
More tools for owners preparing an exit.
Test the Balance Sheet Before the Offer Arrives
The 90% test can be fixed the week before closing. The 50% test and the holding period cannot. Send us the last two years of financial statements and the share register, and we will tell you where you stand and what has to change.