Entrepreneurs to get tax break on capital gains inclusion

Entrepreneurs who sell their businesses will get a tax break under Budget 2024, ensuring they “benefit from the fruits of their hard work while facing lower tax burdens,” the budget said.

On Tuesday, the federal government proposed an increased capital gains inclusion rate of two-thirds, but the Canadian Entrepreneurs’ Incentive would reduce the rate to one-third (33.3%) on a lifetime maximum of $2 million in eligible capital gains.

Combined with the budget’s proposed increased lifetime capital gains exemption (LCGE) of $1.25 million from $1,016,836, entrepreneurs will have a combined exemption of at least $3.25 million when selling all or part of a business, once the incentive is fully rolled out, the budget said.

“Entrepreneurs with eligible capital gains of up to $6.25 million will be better off under these changes,” the budget said. “In practice, these numbers will likely be higher to reflect the inflation adjustment for the lifetime capital gains exemption and the ability to spread capital gains over multiple years.”

The combination of the indexed LCGE with the incentive could mean “millions of dollars of potential low-tax or no tax capital gain on the sale of a qualifying small business corporation,” said Jamie Golombek managing director, tax and estate planning with CIBC Private Wealth in Toronto.

The lifetime limit would be phased in at $200,000 per year, beginning on Jan. 1, 2025, before reaching $2 million by Jan. 1, 2034, the budget said.

The incentive will be available to founding investors in certain sectors who own at least 10% of shares in their business, and if the company has been their principal employment for at least five years, the budget said.

Professional corporations aren’t eligible. Nor are corporations in sectors such as financial, insurance, real estate, food and accommodation, arts, recreation and entertainment, along with consulting or personal care services.

“There’s a long list of exclusions,” including services industries, said Brian Ernewein, senior advisor with KPMG LLP in Ottawa. “I don’t know necessarily that it’s right to … discriminate against them.” More generally, “it will be very difficult to set borderlines” for eligible businesses, he said, so the measure will probably require more discussion.

This measure, which would apply to dispositions that occur on or after Jan. 1, 2025, is expected to cost $625 million over the next five years, the budget said.