QSBS, Eh? Canada’s New $15 Million Capital Gains Exemption

“Can we get qualified small business stock (QSBS) treatment for Canadian investors?” The answer to that question is usually no. A generous tax exemption for the sale of qualified shares of qualified corporations has existed in the US for some time in the form of QSBS and has provided for a significant incentive for the creation of, and investment into, US businesses. For Canadians, we have the lifetime capital gains exemption (LCGE), but at $1.25 million, this was hardly the major attraction compared to QSBS, which provides US taxpayers with an exemption of $15 million per eligible corporation (or potentially more, as discussed below). 

Perhaps we should thank President Trump for the Canadian Government’s push to incentivize Canadians to start and invest in Canadian businesses as the Federal Budget, released on November 5, 2026, proposes to include a homegrown version, the Canada Growth Incentive (CGI). It comes with the same $15 million cap, which is refreshingly un-Canadian in its generosity, but with a prescriptive set of rules that is unmistakably Canadian. In true Canadian fashion, it holds the door open for founders, then politely asks whether they are a Canadian-controlled private corporation (CCPC), how long they have held their shares, and whether they happen to be a professional services business. (Sorry, us lawyers.) Given that the regimes are very similar in concept but differ in many details, it’s worth a comparison. 

What Are the Basics?

The CGI would allow a Canadian-resident individual to exempt capital gains on the disposition of qualifying shares of a qualifying corporation, up to $15 million per individual for each business. It would apply to shares issued on or after November 5, 2026 (“Budget Day”) and before 2037. Draft legislation has yet to be released, and query whether the provinces will enact similar rules.

QSBS, by contrast, is permanent US law. For stock issued after July 4, 2025, the One Big Beautiful Bill Act (OBBBA) raised the per-issuer cap to the greater of $15 million (indexed for inflation after 2026) or 10 times the holder’s basis. It also added a tiered exclusion based on how long the stock is held, provided that, to get the full exclusion, the shares must be held for at least five years. Some states do not follow the QSBS rules, so there may be tax on a sale even with the QSBS. 

Who Can Claim the Exemption?

The CGI is limited to individuals who are least 18 years old and resident in Canada throughout the year of the claim, and excludes trusts. This limitation seems to be specifically targeted at family trusts as it is common planning to multiply the LCGE through a family trust for family members. It may also be targeted at preventing a common US tax planning strategy where US taxpayers seek to multiply or “stack” their QSBS per-issuer cap by gifting QSBS to certain non-grantor trusts for the benefit of family members. Shares held through a partnership can qualify if the individual was a member, and at least 18 years old, when the partnership acquired them.

QSBS is available to noncorporate taxpayers generally, including trusts and estates, with look-through rules for partnerships and S corporations (although there are various “traps” for the unwary for taxpayers who hold their QSBS through partnerships or S corporations). As trusts are not eligible for the CGI, there is no Canadian equivalent to the US “stacking” strategy referred to above.

What About the Issuer of the Shares? 

When CGI shares are issued, the issuer must be a CCPC. The combined carrying value of the issuer’s assets and those of all related corporations cannot exceed $100 million immediately before and after issuance. When the shares are sold, the corporation must be Canadian resident and either private or listed on a designated Canadian stock exchange.

QSBS requires a domestic C corporation with aggregate gross assets of no more than $75 million (indexed for inflation after 2026) at all times prior to and immediately after issuance (i.e., once a corporation’s gross assets exceed $75 million, the corporation can no longer issue QSBS even if the gross asset value has dropped below $75 million at the time of the issuance). Because carrying value and gross assets (which is generally based on the tax basis of the assets of the corporation) are measured differently, the gap between the two limits is not as simple as the headline numbers suggest.

How Must the Shares Be Acquired?

CGI shares must be issued directly to the individual or their partnership, either solely for cash or in exchange for employment services provided to the corporation. In addition to cash or services, QSBS can be issued for property (other than stock of another corporation, subject to certain exceptions). As a result, founders who incorporate an existing business by contributing its assets may not qualify for the CGI. Continuity rules for share-for-share exchanges and other reorganizations are promised but not yet released. The US already has established carryover rules that may permit QSBS treatment for shares received in certain share-for-share exchanges or tax-free reorganizations, provided that the transferred shares qualify as QSBS.

What Does the Active Business Test Look Like? 

The CGI applies three separate asset tests:

• At issuance, at least 90% of the corporation’s asset value must be attributable to assets used, or reasonably intended to be used, within 36 months, principally in a qualifying business carried on primarily in Canada. 

• Throughout the holding period, at least 50% of asset value must be attributable to assets used principally in a qualifying business, and the business must be carried on primarily in Canada for at least the first 24 months after issuance.

• At disposition, the 90% test applies again.

QSBS instead applies a single test. At least 80% of asset value must be used in the active conduct of a qualified trade or business for substantially all of the holding period. The CGI’s looser middle period helps companies that build up cash reserves, but the strict test at disposition means those reserves must be put to work before an exit. This is similar to the LCGE active business test, which often requires a purification immediately prior to exit in order to access the exemption. In the US, because this “active business test” needs to be satisfied for “substantially all” of a taxpayer’s holding period, there is some flexibility to put money into a shell company that is not initially using its assets in a qualified trade or business, provided that in totality over substantially all of the holding period, the “active business test” is satisfied.

What Types of Industries Are Included or Excluded?

Both regimes exclude consulting, the professional practices of lawyers, accountants, health care practitioners, engineers and architects, businesses whose principal asset is the reputation or skill of employees, and financial, insurance, agricultural, and mining activities. The CGI goes further, excluding real estate, utilities, and also performing arts and athletics, and any business operating under a licensing or franchising agreement. The franchising exclusion in particular may catch consumer brands that would qualify for QSBS.

Specifically, for the CGI, it appears that technology, biotech, life sciences, manufacturing, construction, or product-based businesses will be included. 

How Long Do You Have to Hold the Shares For?

The CGI requires the shares to be held for 36 consecutive months immediately before the disposition (this is a more stringent test than the LCGE). Once that test is met, the full gain is exempt up to the cap, and there is no partial relief for shorter holds. 

For post-OBBBA stock, QSBS excludes 50% of the gain from shares held for at least three years, 75% for shares held for at least four years, and 100% for shares held for at least five years. Canada is therefore more generous at the three-year mark. The US offers more flexibility for earlier exits through a rollover, which allows gain on QSBS held for more than six months to be deferred if proceeds from the sale are reinvested in new QSBS within 60 days.

Is There a Minimum Tax, and Can I Stack Other Benefits? 

Gains exempted under the CGI would be included at a 30% rate for alternative minimum tax (AMT) purposes, consistent with the LCGE. Under QSBS, a 100% exclusion is not an AMT preference item.

Claiming the CGI on a corporation’s shares limits the LCGE available on shares of the same corporation, and the reverse is also true. The CGI can, however, generally be claimed alongside the exemption for sales to an Employee Ownership Trust.

In Summary

Implications for Cross-Border M&A

• Sales to foreign buyers or perhaps an initial public offering: CCPC status is tested only when shares are issued, so a direct sale of a Canadian target’s shares to a US or other non-Canadian acquirer or a share sale following an IPO can still qualify. The target must remain a Canadian-resident corporation, at least 90% of its asset value must be used in a qualifying business at closing, and sellers must have held for 36 months. However, shares issued after a foreign investor acquires control — for example, in a late-stage round — will not be CGI shares, so cap tables should track each issuance and be watched closely. 

• US flips and holding company inserts: In a US flip, Canadian shareholders exchange their shares for shares of a new US parent. The new US parent shares would fail the Canadian-residence test. It may be possible to put holding companies in a structure and still utilize the CGI, but we will have to see the draft legislation. A flip undertaken to access US capital or QSBS may therefore cost Canadian founders the CGI (as it has in the past cost them the LCGE). As before, the trade-off should be modeled before any reorganization, but now losing the CGI carries more significance than losing the LCGE. 

• Exit consideration and timing: The CGI applies to gains on qualifying shares held directly. Rollover equity in a buyer, earn-outs, and deferred consideration should be reviewed to confirm how much of the purchase price benefits from the CGI. Because there is no partial relief before 36 months, closing dates, staged sales, and drag-along timelines should be planned around each seller’s holding period.

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