Capital Gains Exemption: Canadian Tax Course

The 90% test is measured at the moment of sale, but the over 50% test and the anti-stacking rule both look back 24 months, and a CNIL or prior ABIL balance can run back to 1985. Work through QSBC status, bad assets, purification, crystallization under section 85, the trust attribution rules, and the structures that put the exemption out of reach for good.

Michael Cadesky FCPA, FCA, FTIHK, CTA, TEP (Emeritus)

Hugh Woolley CPA, CA, TEP

license

2.0h Verifiable CPD

Certificate of Completion Included

$150 CAD

Capital Gains Exemption: Section 110.6, QSBC Shares, the 90% Test, Purification, and Crystallization

Surplus cash moves up to the parent by dividend once a year. Both corporations are offside the 90% active asset test at the same moment, and under the anti-stacking rule that is enough. The 24-month lookback has already run, the claim is all or nothing, and nothing done in the year of sale repairs it.

Almost nothing about the exemption is decided in the year of sale. The 90% test is measured at the time of sale, the over 50% test looks back 24 months, the anti-stacking rule looks back 24 months across every corporation in the chain, and CNIL and ABIL balances accumulate over decades. By the time a letter of intent arrives, most of the answer is already fixed. This is an area where advisers get sued.

check_circle The 90% active asset test and QSBC status. All or substantially all measured at fair market value including goodwill, the over 50% test throughout the previous 24 months, and the bad assets that are routinely missed: shareholder debit balances, surplus cash, unconnected shares and loans, and corporate life insurance under subsection 110.6(15).
check_circle The 24-month holding period and subsection 110.6(14). Unissued shares deemed held by an unrelated person, the exceptions for incorporating an active business, rollovers by a related person and transfers to and from a trust, and the FIFO ordering rule in paragraph 110.6(14)(a).
check_circle The anti-stacking rule. Only one corporation in a chain can fail the 90% test at any time in the 24-month period, why an annual dividend taints the parent on receipt even if it is paid out the same day, and where surplus cash can safely accumulate.
check_circle CNIL and prior ABIL claims. The cumulative net investment loss computed at year end, the grossed-up dividend as the most effective way to reduce it, and why a capital loss that qualifies as an allowable business investment loss cannot be claimed as an ordinary capital loss instead.
check_circle Purification. Four techniques ranked by the amount of surplus to be moved, the safe income limit on the roll and redeem, and the trust sandwich structure that keeps an operating company onside year after year.
check_circle Crystallization under section 85. The three approaches, the paid-up capital traps that produce an immediate deemed dividend, and the section 84.1 problem that makes a crystallization worse than doing nothing when the purchaser will not buy the holding company.

What You'll Learn

Thirteen sections, in the order the seminar builds them. The statutory framework first, then each of the tests that limits access and the traps inside it, then the planning: purification, crystallization, trust structures, and multiplication among family members.

expand_more Section 110.6 Framework: The Lifetime Limit, Subsection 110.6(6), the AMT Inclusion Rate, and the TOSI Exclusion

What the exemption actually is, and the three benefits that follow from claiming it.

Not an exemption A deduction in computing taxable income for the taxable capital gain, not an exclusion from income.
The 2025 limit $1,250,000, applied as a lifetime total that can be claimed more than once up to the available limit.
Who can claim it A natural individual only, never a corporation and never a trust itself.
Where a trust realizes the gain The taxable capital gain must be allocated to individual beneficiaries who then claim.
Subsection 248(1) Small business corporation status, and the further requirement that the shares be qualified small business corporation shares.
Subsection 110.6(6) The capital gain cannot be netted against the exemption and left off the return, and the consequence if it is.
Subparagraph 127.52(h)(ii) 30% of the gain in the AMT base rather than 100% on a qualifying QSBC disposition.
Subsection 120.4(1) The gain outside the tax on split income rules, applying to the full gain on QSBC shares regardless of how much exemption is claimed, subject to the kiddie tax in a non-arm's length transaction.
Checking the client's history CRA's running record of prior claims, and why a client who says the exemption is used up may still have room after the limit increases.
The related balances to pull CNIL and prior ABIL claims, with a history running back to 1985.

expand_more Corporate Structure: Selling at the Personal Level, Extracting a Second Opco, and the Butterfly Linked to the Sale

The structure that quietly makes the exemption unavailable, long before anyone is thinking about a sale.

The gain must arise at the personal level A sale by a holding company of a subsidiary's shares produces no exemption, no matter how well the subsidiary qualifies.
Two operating companies under one holding company Each qualifying on its own, and neither reachable if only one is being sold.
Removing the retained company A taxable event with no rollover available on a straightforward extraction.
Subsection 110.6(7) Where the removal is structured as a butterfly and can be linked to the sale as part of the series, the exemption claim is denied and the butterfly itself becomes taxable.
The double tax exposure Tax on two capital gains where the linkage argument succeeds.
The value problem Where the extracted company represents more than half the value, the taxable extraction can put the remaining holding company offside.
Why there is no safe waiting period The test is whether the reorganization can be linked to the sale as part of a series, not the passage of a fixed amount of time.
Contemplation of sale Removal in contemplation of a sale may be enough to deny the rollover even with no active sale process underway.
The practical conclusion Restructuring has to be done well before a sale is contemplated, which means reviewing structures on files where nothing is happening.

expand_more The 24-Month Holding Period: Subsection 110.6(1), the Exceptions in Subsection 110.6(14), Section 54.2, and the FIFO Ordering Rule

Four exceptions that rescue a claim, and one averaging problem that halves it.

The basic rule Shares held for at least 24 months, and not owned by an unrelated person at any time in the previous 24 months.
Newly incorporated companies Unissued shares deemed owned by an unrelated person immediately before issue, so the corporation generally has to have existed for 24 months.
Paragraph 110.6(14)(f) The holding period waived on the incorporation of an active business carried on by an individual or a partnership.
Section 54.2 Shares deemed to be capital property on that incorporation, even where the incorporation is carried out in contemplation of the sale.
The other exceptions in subsection 110.6(14) A rollover to a holding company by a related person, a transfer to a trust by a person related to all beneficiaries, and a transfer from a trust out to a beneficiary.
Shares bought from a co-shareholder Where the vendor is unrelated, the purchased block carries its own fresh 24-month clock while the original block does not.
ACB averaging Where there is a single share class, the cost of the newly purchased block averages across the whole holding and depresses the gain eligible on the qualifying shares.
The two fixes Acquiring the departing shareholder's block through a holding company or a trust rather than personally, or converting that block into a separate class before the purchase.
Shares acquired from a related person The prior related holding counted, so a sale shortly after an intergenerational transfer can still qualify.
Paragraph 110.6(14)(a) Identical shares deemed disposed of in the order acquired for purposes of the holding period test.

expand_more The 90% Active Asset Test and Bad Assets: Subsection 248(1), Surplus Cash, Shareholder Debit Balances, and Subsection 110.6(15)

Built on fair market value including goodwill, which means the balance sheet in the file is the wrong starting point.

The two tests All or substantially all of the assets used in an active business carried on primarily in Canada at the time of sale, and over 50% throughout the previous 24 months.
How the measurement is done Fair market value of assets, including goodwill that never appears on the balance sheet.
Backing into goodwill Deriving it from the share price and net equity to build the pro forma balance sheet the test is actually applied to.
What "substantially all" means Generally taken as 90%, capable of varying case to case, and the reason for building in margin rather than landing just above the line.
Surplus cash Whether funds are surplus or working capital, seasonal fluctuation and well capitalized arguments, reserves held for banking covenants or bonding requirements, and why a balance that sits constant year after year is hard to defend.
Shareholder debit balances Invariably a bad asset, and one of the most commonly overlooked.
Loans receivable An active asset where the loan is to a connected small business corporation, otherwise a bad asset.
Shares of other corporations Good where the corporation is itself a small business corporation and connected on the Part IV test of more than 10% of votes and value, which is how a foreign subsidiary becomes a bad asset.
Subsection 110.6(15) Corporate life insurance valued at cash surrender value for this purpose, the key man and lending condition arguments, and the tax cost of removing a policy a purchaser does not want.
Fixing a marginal result Paying a modest dividend before the sale to move well clear of the threshold, with the collateral benefit to a CNIL balance.

expand_more The Anti-Stacking Rule: One Failure Per Chain, the Parent's 50% Test, and Where Surplus Cash Can Accumulate

The hardest part of the exemption to read in the legislation, and the one that most often surfaces too late.

What the rule is for Preventing bad assets from being sprinkled across a group so that each corporation clears the test on its own.
The basic rule In a chain of corporations, only one can fall below the 90% active asset test at any time in the 24-month holding period.
Where the operating subsidiary stays pure The parent has to meet only the over 50% test throughout the 24 months, while still meeting 90% at the time of sale.
Where it does not The parent must meet 90% at all times over the 24-month period, counting shares and debt of the subsidiary as active assets.
What the rule does in substance Converts the over 50% test over 24 months into a 90% test over 24 months.
Two failures in one chain Where two corporations are offside at any time in the 24 months, the exemption is not available.
The annual dividend problem A subsidiary that accumulates surplus cash and distributes once a year puts the parent offside on receipt, even where the parent pays the funds out immediately.
The fix Distributing more frequently so both corporations stay within tolerance throughout the period.
Where cash can safely sit Accumulation at the parent level, kept under the 50% threshold, on the basis that the parent can be purified immediately before a sale.
The design principle Keep every subsidiary onside at all times and let surplus build only at the top of the chain.

expand_more Cumulative Net Investment Loss: Subsection 110.6(1), Investment Expense and Income, and Reducing a CNIL Balance Before Year End

A running total from 1988 that erodes the claim, and that clients have never heard of.

What CNIL is The cumulative excess of investment expense over investment income, computed from 1988 onward and calculated at the end of the calendar year.
Investment expense Most deductible interest expense, losses from property including rental property, and 50% of certain resource deductions.
Investment income Income from property including rental and investment income, 50% of resource income, taxable capital gains, and the grossed-up amount of Canadian taxable dividends.
Why taxable dividends work best The gross-up is counted, so a dividend reduces the balance by more than its cash amount.
Capital dividends No effect on the balance.
The slow accumulation A taxable benefit on a low interest or interest free shareholder loan deducted as interest expense adds to investment expense while the benefit itself is not investment income, so a balance builds year by year without anyone noticing.
Where the balance may not matter A capital gain large enough to exceed the exemption limit can absorb the balance, since half the gain is investment income.
The planning sequence Determine the balance, test whether it will actually reduce the claim, and if so create investment income before the taxation year ends.
Verification CRA's running total from filed returns, and the occasional input error worth checking against.

expand_more Allowable Business Investment Losses and the Annual Gains Limit Under Subsection 110.6(1)

A loss claimed years ago, by a different adviser, that reduces the claim now.

The reduction A previously claimed allowable business investment loss reduces the capital gains exemption available, and has to be recovered before the exemption is accessible.
The policy The ABIL was deductible against ordinary income, so the benefit is accounted for before the exemption is allowed.
The reverse effect A previously claimed exemption reduces future ABIL claims.
An ordinary capital loss No issue where the loss does not meet the business investment loss conditions.
No discretion Where the loss qualifies as a business investment loss, it must be claimed as one, with no option to take ordinary capital loss treatment instead.
The lookback The rule runs from May 23, 1985, so the record has to be checked rather than assumed.
Working the calculation The taxable capital gain reduced by the prior ABIL to arrive at the deduction allowed.

expand_more Purification: Taxable Withdrawal, the Roll and Redeem and Safe Income, and the Trust Sandwich Structure

Four techniques, chosen by how much surplus has to move and whether personal tax can be avoided.

Why it arises A profitable business generates cash the shareholders do not need, it is left in the group to defer personal tax, and small business corporation status is lost.
Using the cash in the business Buying eligible assets such as inventory, funding expansion, or paying down liabilities including trade payables.
Taxable withdrawal An eligible dividend where there is a GRIP pool, an ineligible dividend where there is a NERDTOH balance, and salary or an ineligible dividend otherwise with little overall difference once the corporate position is taken into account.
The timing requirement The funds have to actually be paid out before the sale, not accrued or declared.
The roll and redeem A holding company created, a minority interest in the operating company rolled in, and those shares redeemed to produce an intercorporate dividend.
The safe income limit Only the safe income attributable to the rolled interest shelters the deemed dividend, with the excess treated as proceeds of disposition and producing a capital gain in the holding company.
What the technique buys Surplus removed and small business corporation status restored at a corporate tax cost, with no personal tax paid.
The trust sandwich Common shares of the operating company held by a trust, with a corporate beneficiary alongside the family members.
The connected requirement The operating company and the corporate beneficiary connected for Part IV purposes through common non-arm's length control.
How it operates Dividends paid to the trust and allocated onward to the corporate beneficiary, leaving the trust with nil taxable income and the operating company purified on an ongoing basis.
The year of sale trap The case law holding that a dividend flowed through a trust is received on the last day of the year, and the connected status problem that creates in the year the operating company is sold.
The exit The trust sells the operating company shares and allocates the gain to individual beneficiaries.

expand_more Structures That Cannot Be Purified, and the Freeze at the Operating Company Level

What is left when the holding company is beyond repair.

When the exemption is out of reach A holding company carrying assets no purchaser would take, bad assets above 50% so purification is not possible, or another corporation sitting under the holding company.
The common fact pattern Real estate and investment assets bought in the holding company with dividends paid up over the years from a qualifying operating company.
The freeze alternative Preferred shares of fixed value issued to the holding company and new common shares issued to individual family members at the operating company level.
Sequencing Paying a dividend up to the safe income of the operating company before the freeze is implemented.
Keeping it onside afterward Distributing excess cash by redeeming the preferred shares, with the capital gain and safe income consequences that follow.
What the plan depends on New common shares with nominal value at the outset, a 24-month holding period on those shares, and growth in the operating company so the shares take on value.
Enhancing the result Switching remuneration from salary to dividends taken by way of preferred share redemptions.

expand_more Crystallization: Section 85 to a Holdco, the Internal Section 85, Section 84.1 on Extraction, and the PUC Traps

A technique that produces a worse result than doing nothing if the exit is not thought through first.

Why crystallize A corporation that will cease to qualify, for example on setting up a foreign subsidiary, concern that the exemption may be curtailed, difficulty keeping the corporation purified, or a partial sale to non-residents that costs CCPC status.
The three approaches A transfer to a holding company with a section 85 election, an internal share exchange with a section 85 election, or a sale at fair market value to a non-arm's length party such as a spouse, children, or a family trust.
Why an internal transaction works Subject to the kiddie tax, there is no rule against realizing the exemption internally, though the shares still have to be sold at the individual level.
Consideration on the transfer to a holding company No promissory note taken back, since a deemed dividend results immediately, and no high paid-up capital shares.
The commitment made at that point The holding company shares are what has to be sold later, because selling the operating company shares leaves the funds inside the corporation.
Section 84.1 on the way out High ACB and low PUC on the holding company shares, so extracting the funds produces a taxable dividend, likely ineligible, taxed more heavily than the capital gain would have been with no exemption at all.
Keeping the holding company saleable Not accumulating investment funds or risky assets that a purchaser will refuse.
The TOSI consequence A holding company interposed above multiple shareholders can fail the excluded shares test and shut down dividend splitting.
The internal section 85 An exchange into a new class that would otherwise fall under section 51 or section 86, with a section 85 election filed so proceeds can be selected, and no new corporation required.
The technical trap on the exchange New shares must carry low paid-up capital or a deemed dividend arises immediately.
The sale to a trust A gain fixed by the fair market value of the shares with no ability to select proceeds, which makes the valuation the controlling document.
Subsection 110.6(31) A note taken back on that sale allowing the gain to be recognized over five years.
Subsection 75(2) Attribution where the vendor is a beneficiary or a trustee of the purchasing trust, which attributes the trust's later gain and defeats the plan.

expand_more Trusts: Subsection 75(2) Reversion, Spousal Attribution, the Kiddie Tax on Crystallization, and the Section 74.4 Designated Persons Clause

Five ways a trust that was set up to multiply the exemption ends up preventing it.

What the trust is for Multiplying the exemption among family members, and allocating a gain realized on the shares out to individual beneficiaries.
Subsection 75(2) The reversion rule, triggered where the person who transferred the shares in is sole trustee or one of two, attributing the entire gain back.
Spousal attribution Applying where a gain is allocated to a spouse, unless a note taken back meets the prescribed rate loan requirements.
Crystallizing inside a trust Never with an allocation to minor beneficiaries, where the kiddie tax deems the gain to be an ineligible dividend taxed at the top rate.
The minimum allocation At least the taxable capital gain paid or made payable to individual beneficiaries, though not the whole gain or the whole proceeds.
Round robin distributions Funds distributed to beneficiaries become their property, and gifting them back is likely to be challenged and assessed to the person who ends up with them.
The section 74.4 clause A designated persons clause barring a spouse and persons under 18 from benefiting, sometimes called a springing trust.
Its effect The exemption cannot be multiplied among those persons at all, and the clause is common in trusts created as part of a freeze.
What to do about it Reading the trust agreement before the plan is designed rather than after the sale is agreed.

expand_more Family Farm and Fishing Property: Subsection 110.6(2.2), the Ordering Rule in Subsection 110.6(2.3), and Quotas

A separate regime with a lower limit, a mandatory ordering rule, and one asset it does not reach.

Subsection 110.6(2.2) The limit fixed at $1,000,000 and not indexed.
Not additive An alternative to the regular exemption, with the combined claim capped at the regular limit for the year.
Subsection 110.6(2.3) The ordering rule requiring the regular QSBC exemption to be claimed first where it is available.
The three forms of claim Directly held assets, an interest in a family farm or fishing partnership, and shares of a family farm or fishing corporation.
The direct asset claim Real property or a fishing vessel only, used in the business by the individual, a spouse, a child or a parent, with a family member actively engaged in at least two prior years.
The only directly held asset The single circumstance in which an asset rather than shares or a partnership interest can support a claim.
Quotas Not eligible when held personally, which matters because the quota is often the most valuable asset in the operation.
The workaround Transferring the quota to a partnership or a corporation before the sale so the interest or the shares are what is sold.
The partnership and corporation tests The 90% test at the time of sale and the over 50% test throughout some previous 24-month period, with the active engagement requirement measured over some 24-month period rather than necessarily the one before the sale.
Why the regime now lags Its history against the regular exemption limit, and why the regular claim is often preferred where QSBC shares are available.

expand_more Reserves Under Subsection 110.6(31), Section 128.1 on Emigration, Paragraph 110.6(14)(g) on Death, Multiplication, and Documentation

The special rules, the two ways the exemption is multiplied, and the file you want if the claim is questioned.

The capital gains reserve Available where the full proceeds are not taken back, spreading the gain over five years with a minimum 20% recognized annually.
The extended reserve Ten years on a sale of small business corporation shares to a child or grandchild.
Using the reserve on AMT Spreading the exemption claim across years to reduce or eliminate the minimum tax.
The limit on a reserve claim Fixed at the exemption amount in place for the year of sale, not the higher amounts that apply as the limit rises.
Section 128.1 The deemed disposition on becoming a non-resident, and the exemption available on the resulting gain where the other conditions are met.
Paragraph 110.6(14)(g) Shares qualifying if they met the test at any time in the 12 months before death.
Why that rule is useful A corporation that accumulates cash through the year and distributes it annually may be offside at the date of death but onside at an earlier point in the window.
Multiplying on death Shares left to a spouse or common-law partner on a rollover basis, with the exemption claimed by the deceased and again by the survivor.
The taxable sale route A sale at fair market value to a family member with a note bearing interest at the prescribed rate, and the election out of the spousal rollover.
The freeze route New common shares issued to family members or a family trust, with the attribution and section 74.4 clause issues checked first.
Extracting the ACB created Generally not possible in a non-arm's length transaction, with an exception on a transfer of a family business to descendants meeting the various tests.
The documentation file Confirming available exemption, CNIL and ABIL balances, the pro forma balance sheet supporting the 90% test at the time of sale, and confirmation that the proceeds are actually received personally.

Learn Directly from Tax Experts

Michael Cadesky

FCPA, FCA, FTIHK, CTA, TEP (Emeritus)

Managing partner at Cadesky Tax, practising since 1980 and a Fellow of CPA Ontario. Past governor of the Canadian Tax Foundation, past chair of STEP Canada and STEP Worldwide, and past chair of the CPA Canada Tax Committee for Small and Medium-Sized Enterprises. Co-author of 11 books on tax subjects.

Hugh Woolley

CPA, CA, TEP

Independent tax consultant who has taught income tax for over 30 years. Hugh has written courses for CPA Canada and over 10 papers for the Canadian Tax Foundation and STEP Canada. From 1990 to 1992 he worked at the CRA's Rulings Directorate in Ottawa writing butterfly tax rulings, and is a past Governor of the Canadian Tax Foundation.

Frequently Asked Questions

Can I start right away? expand_more

Yes. Recorded live on October 9, 2025 and available on demand. Register and begin immediately at your own pace.

Does this course provide verifiable CPD? expand_more

Yes. You will receive a verifiable CPD certificate for 2.0 hours of instructional learning upon completion.

What is included with registration? expand_more

The full seminar recording and the slides with detailed notes, with one year of access from your date of registration.

Who is this course for? expand_more

CPAs and tax professionals advising owner-managed businesses, and anyone preparing a corporation for sale, purifying a group, implementing a crystallization or a freeze, reviewing a family trust, or signing a return that claims the exemption.

Is there a cost to register? expand_more

Registration is $150 CAD, a one-time payment with no subscription required.