What can disqualify shares from the lifetime capital gains exemption even if the business itself qualifies?

The rule: two independent denial triggers

Subsection 110.6(6) denies the deduction for late or negligently unreported gains, with a one-year grace period built in before the knowing-or-negligent standard applies. Paragraph 110.6(7)(b) denies it separately where property was dropped into the corporation below fair value as part of the same series of transactions as the disposition — a test aimed at manufactured active-asset ratios, not at the sale itself.

When it changes

A third, unrelated route to denial sits in section 55(3)(a): the related-party exception to the capital-gains-stripping rule carries its own list of disqualifying events involving an unrelated person, and a sale that walks into one of them can undo planning that had nothing to do with the exemption test itself. These triggers do not overlap — each has to be checked on its own facts.

Where this played out — Case Files

One file turns on a filing years before the current sale, unconnected to the shares being sold now. A second shows the active-asset test passed on paper and the deduction refused anyway, because the assets were acquired below value as part of the same series. A third shows the section 55(3)(a) exception cancelled by the sale itself.

Sources

• • Income Tax Act s.110.6(6) and s.110.6(7)(b) — laws-lois.justice.gc.ca.
• • Income Tax Act s.55(3)(a), the related-party exception and its disqualifying events — cited for the structural contrast; not separately quoted here.
• • Treadstone Law — common mistakes that lose the lifetime capital gains exemption — general background on how the exemption is lost; it does not work through the section 110.6(7)(b) active-asset trigger, which is the specific point here.