A qualified small business corporation share (QSBC share) is a share of a Canadian-controlled private corporation that meets a three-part ownership and asset-composition test in ITA s. 110.6(1) — it is the gate an individual vendor's shares must pass through before any part of the sale proceeds can be sheltered by the lifetime capital gains exemption.
The definition in ITA s. 110.6(1) stacks three tests on top of one another. First, “at the determination time” — the moment of sale — the share must be a share of a “small business corporation,” a term defined in ITA s. 248(1) as a Canadian-controlled private corporation where “all or substantially all” of the fair market value of its assets is attributable to assets used principally in an active business carried on primarily in Canada. Second, throughout the 24 months immediately before that moment the share must not have been owned by anyone outside the vendor or a related person or partnership. Third, throughout that same 24-month window — a lower bar than the moment-of-sale test — more than 50% of the corporation’s asset value had to be attributable to active-business assets, not the “all or substantially all” standard that applies right at closing.
That gap between a “more than 50%” test running for two years and an “all or substantially all” test at the moment of sale is the whole reason QSBC status is a due-diligence item and not a formality. A target that has been accumulating retained earnings in marketable securities or sitting on surplus cash can fail the stricter “all or substantially all” test at closing even if it comfortably clears the lower 50% test throughout the prior two years — which is why vendors run a “purification” step (an inter-corporate dividend of the passive assets, or an internal reorganization) before signing. And because only an individual can claim the exemption, a share held by a fund, a holding corporation or a trust that is not a personal trust does not itself carry QSBC status into anyone’s hands — the $625,000 taxable-gain deduction in ITA s. 110.6(2.1) belongs to the individual vendor, not to the entity selling.
A founder personally holds 100% of an operating company that a fund is buying outright. Over the prior three years the company built up $1.4M of surplus cash sitting in a market-linked GIC ladder, which on its own would push the corporation below the “all or substantially all” active-business threshold at closing. Before signing, the founder’s holdco receives a tax-free inter-corporate dividend equal to that surplus, restoring the target to “all or substantially all” active-business assets at the determination time. Counsel on both sides confirm the 24-month ownership and 50% tests are independently satisfied, and only then does the purchase agreement proceed on the basis that the founder’s shares are QSBC shares eligible for the exemption — a status a non-resident co-founder in the same deal cannot claim on their own shares regardless of how the corporation is structured.
See also: Section 84.1 · Share purchase agreement · Section 85 rollover.
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