QSBC (Qualified Small Business Corporation)

A Qualified Small Business Corporation (QSBC) is a Canadian-controlled private corporation (CCPC) that meets specific asset tests, making its shares eligible for the Lifetime Capital Gains Exemption (LCGE). The QSBC rules are set out in subsection 110.6(1) of the Income Tax Act.

To qualify as a QSBC at the time of sale, the following tests must be met: (1) at least 90% of the corporation's assets must be used principally in an active business carried on primarily in Canada (the 90% test); (2) for the 24 months immediately before the sale, more than 50% of the fair market value of the corporation's assets must have been used principally in an active business carried on primarily in Canada (the 50% test); and (3) the shares must have been owned by the seller or a related party for the 24 months immediately before the sale.

Excess cash, marketable securities, and real estate held for investment can disqualify a corporation from QSBC status by pushing passive assets above the thresholds. Purification — removing passive assets before the sale — is a common pre-sale planning step to ensure QSBC eligibility.

See also: LCGE, Capital Gains, Purification, Estate Freeze, Share Sale, CCPC.