What counts as a passive asset for these tests?

Investment portfolios, surplus cash beyond working needs, rental real estate unrelated to operations — anything not used principally in the active business.

What is purification?

Tax-deferred removal of passive assets from the Opco, usually to a Holdco via a s.85 rollover or inter-corporate dividends, so the shares meet the QSBC asset tests.

Does claiming the LCGE trigger anything else?

Often AMT in the claim year (generally recoverable within seven years) — and in family sales, s.84.1 lurks. That is why the Transaction-Year Checklist exists.

QSBC / LCGE Risk & Purification Planner

Is your $1,275,000 exemption at risk? The “substantially all” test, the 24-month clock, and the purification runway.

★ CHAPTER BRIEF

The LCGE shelters $1,275,000 (2026) of gain per shareholder on qualifying small-business shares — the largest personal tax shelter in Canadian law. And it dies quietly: every year of retained earnings piling up as passive assets pushes the shares toward failing the “substantially all active” tests. Most owners discover the failure during due diligence, when it is too late to fix.

Two tests govern: at sale, roughly 90% of assets must be active; through the preceding 24 months, more than 50% — continuously. The fix is purification: moving passive assets to a Holdco through a tax-deferred reorganization. It takes quarters to execute and 24 clean months to season.

This planner flags your position today, prices the shelter at stake across every qualifying family shareholder, and back-plans the purification deadline from your target sale date. Chapter 4’s architecture (Holdco–Opco from the start) exists precisely so this page never shows you a red flag.

★ KEY POINT

The LCGE multiplies: spouse, children, a family trust’s beneficiaries — each qualifying shareholder shelters up to $1,275,000. On a $4M sale, structure is the difference between one exemption and three.

⚠ WARNING

Purification cannot be rushed at the deal table: the 24-month holding test looks backward and cannot be cured retroactively. If a sale is even conceivable within three years, the reorganization conversation starts now.

Your numbers

Active business assets (FMV)

Equipment, goodwill, receivables, working cash — used in the business.

Passive assets (FMV)

Investment portfolios, surplus cash, rental property in the Opco.

Expected gain per shareholder at sale

LCGE-qualifying shareholders1

Multiplying the exemption across family is Ch 16’s move.

Years to target sale3y

LCGE tax shelter on your sale

$341,254at risk — purification needed

⚠ Passive assets are 28.6% of the balance sheet — the shares fail the “substantially all active” test today. Unpurified, that puts $341,254 of LCGE tax shelter at risk. You’d need to move about $520,000 of passive assets out (typically to a Holdco via tax-deferred reorganization). With a sale ~3 years out, purification must be finished within 12 months so the shares run clean for the final 24. Start the reorganization conversation now — these take quarters, not weeks.

0% passive10% — sale test line50% — holding test line

Passive share today: 28.6%

⚠ Purification runway: the reorganization must be complete within 12 months so the shares run clean for the final 24 before closing.

Test	Requirement	Your position
At sale	≈90% active assets	71.4% active
24 months prior	>50% active throughout	passing today
Shelter per shareholder	up to $1,275,000 of gain	$1,275,000
Tax saved at 26.77%	—	$341,254

Figures as of July 2026 · Ontario basis · Educational illustration, not advice — confirm current rates with your CPA.

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Questions to ask your advisor

Ask your CPA

Run the QSBC tests on my last balance sheet — where do we sit against 50% and 90% today?

Ask your Tax counsel

Design the purification: what moves to the Holdco, under which rollover, and by when for my sale window?

Ask your CPA

Which family members could hold qualifying shares, and what would multiplying the exemption save?

Continue in book order

From Chapter 16Estate Freeze Estimator From Chapter 15Transaction-Year Checklist From Chapters 2 & 5The Passive-Income Grind (AAII)

Educational illustration, not advice. This tool is provided for educational purposes only and does not constitute financial, tax, legal, accounting, or insurance advice. Results are estimates, not promises — hypothetical illustrations are projections only. Figures use Ontario rates as of the date stamped above; rates and limits change. Confirm current figures and your specific situation with a CPA, tax lawyer, and licensed insurance advisor before acting.