Stay ahead with QSBC status management

Proactively monitoring whether your business meets qualified small business corporation (QSBC) status is essential to understanding what tax planning strategies are available. If tax planning requires this status but it is not managed, when the time comes to take advantage of available tax planning, it can be too late to correct the problem. The following will help break down the benefits, and how to achieve and maintain QSBC status. 

The benefits 

QSBC status is required to take advantage of many useful tax-planning opportunities, including: 

• The lifetime capital gains exemption – As of 2025, Canadian-resident individuals have a lifetime limit of $1,250,000¹ of capital gains that may be realized tax free² on dispositions of QSBC shares. 

• Certain transfers of businesses between family members – QSBC share status is a necessary requirement of the legislation regarding intergenerational transfers, which permits transfers of an incorporated business from a parent to a corporation owned by a child or grandchild, and the division of an incorporated business between siblings, which could otherwise be subject to adverse tax consequences.  

• Preventing the application of corporate attribution – The Income Tax Act contains rules referred to as the attribution rules that prevent a taxpayer from transferring property into a corporation in order to split income with another taxpayer. These rules can be punitive and result in additional taxable income for the transferor, even if not received. When the QSBC share status is maintained (including the 90% test discussed below), these rules will not apply. 

Requirements for QSBC status 

There are three main requirements for shares of a corporation to be considered QSBC shares:  

1. The “90% test” – The corporation must be a small business corporation, meaning that it is a Canadian-controlled private corporation and all or substantially all (generally, 90 per cent or more) of its assets must be used principally (generally, 50 per cent or more) in an active business carried on primarily in Canada. 

2. The “holding period test” – The shares cannot have been issued from treasury for cash or owned by anyone unrelated to the individual shareholder in the previous 24 months.  

3. The “50% test” – Throughout the previous 24 months period, 50% or more of the assets of the corporation must be used principally in an active business carried on primarily in Canada (by the corporation or a related corporation) and/or shares or debt of other connected corporations that meet these same criteria. 

Common risks to QSBC status 

Maintaining QSBC status may seem straightforward, however, there can be some assets that can cause unforeseen issues. Some examples of these are provided below; 

• Holding period test – While there are some exceptions, generally, newly issued treasury shares are deemed to have been held by an unrelated party for the purposes of assessing QSBC status. Timing is important. There are specific exemptions where shares are received as consideration for business assets or similar shares. 

• Excess cash – While some cash is permitted for operations, any cash over and above this operational need will be considered passive, which could have a negative impact on the 50% and 90% asset tests required. 

• Loans to shareholders – These receivable amounts generally are not considered assets used in an active business. If a balance exists at any point, it could cause the corporation to fail to meet the 90% test or the 50% test. Managing these balances requires ongoing assessment (not to mention, shareholder benefit income inclusions). 

• Loans to other corporations – Depending on corporate relationships, both in the past and at the transaction date, the impact may be mitigated. However, in many circumstances intercorporate loans are not desirable for QSBC status purposes as they can be considered passive assets. Understanding the corporation relationship is key to navigating this rule and can be complex with many hidden traps. Where these rules are being navigated, it is imperative to complete a detailed technical analysis to ensure compliance. 

Disclaimer

The above summarizes complex sections of the Act and does not address some of the additional requirements or considerations for meeting these tests. An advisor from Baker Tilly should always be consulted in order to confirm the achievement of these tests prior to a transaction. 

Footnotes 

¹ This amount will continue to be subject to indexation for the Consumer Price Index as per paragraph 117.1(2)(c) of the ITA. 

² A refundable tax referred to as Alternative Minimum Tax may apply in some situations.