Update On The Capital Gains Exemption And Qualified Small Business Corporation Shares

Canadian taxpayers are currently afforded a cumulative lifetime exemption on capital gains realized from the sale of qualified small business corporation shares and on a qualified farm property or a qualified fishing property. A deduction on capital gains realized from any such sale(s) is permitted, up to the exemption amount, which as of June 25, 2024, was increased from $1,016,836 to $1,250,000, indexed for inflation. The new amount applies to sale(s) which take place after that date.

What are Qualified Small Business Corporation Shares?

In accordance with section 110.6(1) of the Income Tax Act (the “Act”), qualified small business corporation shares must be shares of a Canadian Controlled Private Corporation (“CCPC”) and must satisfy the following three criteria:

1. At the time of the sale of the shares, at least 90% of the fair market value of the corporation’s assets must be used in an active business carried on primarily in Canada (hereinafter referred to as the “90% Test”); 
2. During the 24 months prior to the sale of the shares, at least 50% of the fair market value of the corporation’s assets must be used in an active business carried on primarily in Canada (hereinafter referred to as the “50% Test”); and,
3. During that same 24-month period, the shares must have been owned by the individual taxpayer or a person related to him or her.

What is an Active Business?

In accordance with section 248(1) of the Act, an active business means any business carried on by a Canadian tax resident, other than a specified investment business or a personal service business.

Moreover, a holding company that only earns passive investment income (e.g., interest, dividends, etc.) will generally not qualify as an active business.

What if a Corporation Does not Meet the 50% Test or the 90% Test?

While this blog does not go into detail on this topic, here’s the short answer: if a corporation does not meet the 50% Test or the 90% Test, it can “purify” its assets by, for example, removing excess cash or passive investment assets.

However, as a reminder, if purification is necessary to satisfy the 50% Test, the corporation must then wait 24 months before engaging in any sale of its shares.

Update on the Canadian Federal Government’s Proposal to Increase the Capital Gains Inclusion Rate and the Total Capital Gains Exemption Amount

In April 2024, the Justin Trudeau-led Federal Government, in its annual budget, proposed increasing the capital gains inclusion rate from 50% to 66.67%. More specifically, individuals would continue to be subject to the 50% inclusion rate on the first $250,000 of capital gains, but be subject to the 66.67% inclusion rate on the amount of any capital gains exceeding $250,000. The new inclusion rate was initially set to take effect on June 25, 2024, but was deferred until January 1, 2026.

On March 14, 2025, Mark Carney was sworn into office, succeeding Justice Trudeau as Canada’s Prime Minister. Shortly thereafter, on March 25, 2025, the Federal Government advised that it no longer intended to follow through with the increase to the capital gains inclusion rate, however the increase in the cumulative lifetime exemption amount to $1,250,000 on the sale of qualified small business corporation shares would be implemented, which the federal budget presented on November 4, 2025 confirmed.

Key Takeaways

At the end of the day, the only significant recent change in tax law regarding the taxation of capital gains has been the increase in the lifetime capital gains exemption amount on the sale of qualified small business corporation shares, which now sits at $1,250,000.

On death, Canadian tax residents are deemed to have disposed of all capital assets, which includes shares of a private corporation, at fair market value immediately before death. If he or she owns qualified small business corporation shares on death, the above increase to the exemption amount, will minimize the taxes owed in the final [terminal] tax return, and assist with any succession planning.

Additionally, the use of a family trust that holds shares of a private corporation can increase the total family capital gains exemptions available as it is possible for each capital beneficiary of the trust to utilize the exemption.

For Further Reading

Check out some of our firm’s previous blogs on issues related to taxation on death and the lifetime capital gains exemption on the sale of qualified small business corporation shares.

Estate and Trust Taxation – Important Considerations - updated February 2025

Update: Tax Compliance for Executors and Trustees, plus Key Deadlines – December 16, 2024

The Principal Residence and Capital Gains Tax – New Rules, New Pitfalls – May 16, 2017

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.