Qualified Small Business Corporation Shares: Advantages of Incorporation
Contact Neufeld Legal for your incorporation legal work at 403-400-4092 / 905-616-8864 or Chris@NeufeldLegal.com
Qualified Small Business Corporation (QSBC) Shares are critical to an individual to claim the valuable Lifetime Capital Gains Exemption (LCGE), given the LCGE must be claimed on the sale of those shares.
Key Benefit: Lifetime Capital Gains Exemption (LCGE)
The main advantage of owning QSBC shares is the ability to use your LCGE to shelter a significant portion of the capital gains realized on their sale from income tax.
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LCGE Limit: The cumulative lifetime limit for the LCGE is a substantial, indexed amount. As of June 25, 2024, the limit on capital gains from QSBC shares (and qualified farm or fishing property) increased to $1.25 million (indexed annually starting in 2026).
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Tax Savings: Since only 50% of a capital gain is taxable (the "inclusion rate"), the LCGE effectively allows an individual to deduct capital gains up to the lifetime limit, resulting in significant tax savings.
QSBC Share Eligibility Conditions
For a share to be considered a QSBC Share at the time of sale, it must meet a complex set of three main conditions. It is crucial to meet all of these tests:
1. Small Business Corporation (SBC) Test (at Time of Sale)
The corporation must be:
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A Canadian-Controlled Private Corporation (CCPC) at the time of sale, and
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All or Substantially All Assets: 90% or more of the Fair Market Value (FMV) of the corporation's assets must be used primarily in an active business carried on mainly in Canada (or be shares/debt of a connected SBC).
2. Basic Holding Period Test (24 Months)
Throughout the 24 months immediately before the sale, the shares must not have been owned by anyone other than:
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The individual seller.
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A person related to the individual (e.g., a spouse or parent).
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A partnership of which the individual was a member.
3. Active Business Asset Test (24 Months)
Throughout the 24 months immediately before the sale, the corporation must have been a CCPC, and:
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More Than 50% Assets: More than 50% of the FMV of the corporation's assets must have been used primarily in an active business carried on mainly in Canada (or be shares/debt of a connected SBC).
Further Considerations of Significance
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Purification: The asset tests are often the most difficult to meet, especially the "90% or more" test at the time of sale. If a corporation holds too many passive assets (like excess cash or investments not used in the active business), a "purification" strategy may be required to remove these non-active assets before a sale. This requires careful, advanced tax planning.
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Canadian-Controlled Private Corporation (CCPC): Both the shares and the corporation itself must meet the CCPC definition, meaning it is a private corporation controlled by Canadian residents and not by non-residents or a public corporation.
Due to the complexity and strict definitions, QSBC status is not automatic and requires careful planning and compliance with the Income Tax Act. As such, working with knowledgeable tax lawyers and accountants is critical to properly implementing these tax minimization strategies.
So if you are looking to incorporate a new corporation or deal with the corporate legalities impacting your company, contact our law firm to schedule a confidential consultation with a lawyer experienced in the legal intricacies of business incorporation and commercial business development at 403-400-4092 [Alberta], 905-616-8864 [Ontario] or via email at Chris@NeufeldLegal.com.
