Cash Out Clean: QSBC Shares and the Lifetime Capital Gains Exemption When You Leave Canada

This is educational, not individualized tax advice. Consult a qualified professional before restructuring. If you would like to work with us, reach out via DM on X @BowtiedBrazil

You own shares in a healthy Canadian‑controlled private corporation, perhaps a Waterloo SaaS co, a Calgary dental clinic, etc.

A sale is on the horizon, or you are eyeing life abroad, and you need to learn about two important tax concepts to potentially save you a lot on tax.

First is the qualified small business corporation (QSBC) test, which decides whether your shares receive special treatment; second is the lifetime capital gains exemption (LGCE), which can shelter about $1mm of gains per resident in 2024, indexed each year. Use the combo well and you walk away nearly tax‑free in some situations.

Use it badly and your goodbye tax balloons, or a share sale morphs into a dividend.

What makes a share QSBC?
Three tests apply.

On the day you sell, or on the day you become a non‑resident, the company must be a CCPC (a Canadian controlled private corporation- basically a private company owned by Canadian resident) with at least 90% of its fair value tied to assets used in an active Canadian business. (mouthful).

Throughout the entire twenty‑four‑month look‑back, that active‑asset ratio may never slip below 50 percent.

Finally, you, or a related person, must have owned the shares for those same two years. Cash piles, marketable securities, and a Vancouver rental condo all count as passive. If those passive assets drag the ratio below either threshold, even once, the exemption dies.

You will want to get a professional to evaluate whether you qualify for QSBC status, as without it, the LGCE concept will be null and void/irrelevant

Why the LCGE matters
If your advisor confirms that you are a QSBC, now you want to qualify for the LCGE.

Normally, half of a capital gain is taxable (changing next year to 2/3rds is taxable at your marginal rate). The LCGE erases that taxable half on roughly the first million of eligible gains you realise over your lifetime. QSBC is one of the categories that is eligible for the LGCE

Share the cap table with a spouse and you double the shelter; add adult children and the room multiplies again

Because the reward is rich, CRA audits claims aggressively and looks hard for last‑minute “cash stuffing”

Departure tax complicates the picture.
When you leave Canada, CRA imposes a deemed disposition on your shares the night before exit (see previous substack). If those shares still pass the QSBC tests, you can claim the LCGE against the paper gain.

No buyer hands you cash, so you must choose: pay whatever tax remains after the exemption or file Form T1244 to defer and post security if the total exceeds about $25k. Miss the LCGE designation on your final return, and the shelter is gone for good

The classic crystallise, or “freeze,” move.
Many owners lock in the benefit before they leave. In a freeze, you exchange common shares for fixed‑value preferred shares and trigger today’s gain, then claim the LCGE using the section 110.6(19) designation. New common shares, issued to a family trust or spouse, capture future growth. Later, when you sell for real, the preferred shares have little additional gain, so tax stays low.

Execute the freeze after becoming a non‑resident and you lose both CCPC status and the exemption; CRA might also treat the freeze itself as the final sale

Purification for cash‑heavy companies
Tech start‑ups often sit on large funding rounds, and professionals can leave retained earnings untouched. If passive assets pull the active‑asset ratio below 90 percent at exit, or below 50 percent at any time in the prior twenty‑four months, you fail. Purify early: pay bonuses, prepay expenses, move surplus cash to an investment holdco, or declare dividends to personal holdcos. A last‑minute scrub will not fix the two‑year test.

Special note on farms and fishing corporations.
Family farms and fishing companies enjoy a larger LCGE ceiling of $1 million, indexed. Folding an unrelated business into a farm corporation merely to capture that limit is considered “stuffing.” CRA can invoke GAAR (General Anti-Avoidance Rules) if the assets do not genuinely support farming or fishing

Selling to a foreign buyer? Watch section 84.1.
When a non‑resident purchaser acquires shares you previously froze, section 84.1 can flip what looks like a capital gain into a dividend—fully taxable and, once you are a non‑resident, subject to withholding, often 15 percent. Solutions include selling newly issued common shares instead of frozen prefs, inserting a Canadian acquisition company, or switching to an asset deal

Case study
Maya owns 100 percent of a BC SaaS company worth $2 million, made up of $1.6 million in goodwill and $400k in cash. Two years before moving to Dubai, she pays herself a $300k bonus and prepays licences, boosting the active ratio above 90 percent. She executes a freeze, converts her common shares into $2 million of preferred shares, claims the LCGE, and issues new common shares to a family trust. Two years later, she leaves Canada; the deemed gain on her preferred shares is nil. She defers tax on an unrelated crypto position with a letter of credit. A Dubai buyer later acquires the common shares from the trust. Maya owes no Canadian tax, and any dividends she receives are subject only to a 15 percent treaty withholding.

Dan the dentist learned timing the hard way. He added his spouse as a shareholder six months before selling. Because she failed the twenty‑four‑month ownership test, she lost the LCGE that could have halved their bill.

Quick checklist.
Measure your asset mix at least two years in advance; begin purification early if needed. Ensure every shareholder meets the twenty‑four‑month holding period. Order independent valuations. Freeze early if value already exceeds shelter room. At exit, file your LCGE designation and attach Forms T1161, T1243, and T1244. If a foreign buyer appears, have counsel check section 84.1 exposure.

Canada’s LCGE is generous but fragile. Strip passive assets, freeze value, document every step, and the CRA goodbye will be more pleasant than the altnerative