Tax Tip Thursday

There is another initiative that was proposed in the 2024 budget. It is called the Canadian Entrepreneurs Initiative, or CEI.

While nobody is happy about the change in capital gains inclusion rate changes, this was also proposed, but is actually in the favour of small businesses!

The CEI was first introduced in the Liberals’ Budget 2024, which also proposed increasing the inclusion rate on capital gains from one-half to two-thirds for those who earn more than $250,000 CAD. They have since announced several changes to the Canadian Entrepreneurs’ Incentive (CEI), including plans to accelerate the invective roll out from 10 years to five. The capital gains proposal drew significant ire from Canada’s tech and venture capital communities, but the budget did include two offset measures targeted toward entrepreneurs. The budget proposed increasing the lifetime capital gains exemption from $1 million to $1.25 million CAD. The CEI would also reduce the inclusion rate to 33.3 percent on a lifetime maximum of $2 million CAD in eligible capital gains. The government said when both are fully rolled out, the CEI and increase on the lifetime capital gains exemption would give entrepreneurs a combined exemption of at least $3.25 million when selling business shares worth up to $6.25 million.

Budget 2024 initially proposed that the CEI would increase by $200,000 annually over ten years, to reach $2 million by 2034. The government is now proposing to double the annual phase-in increases to $400,000, to reach $2 million by 2029 instead of 2034. Budget 2024 noted that the CEI would be available to business owners who must be a founder and “at all times since founding the company, held 10 percent or more of all common shares.“

The government is now proposing to claw that ownership requirement back to five percent, and reduce the minimum ownership time to any continuous 24-month period, at any time since the business’ founding. The government is also proposing reducing the level of engagement in the business required from business owners from five years immediately preceding the sale to “any combined three-year period at any time since the founding of the business.”

Finally, the government said it plans to expand the eligibility of the CEI to “more small businesses.” The government noted that qualified farming and fishing property would also be eligible, as well as “additional small businesses,” but did not clarify further.

None of these proposals have been passed, but if we are lucky, this is a step in the right direction for entrepreneurs. This will give Canadian business owners a great opportunity when they are in a position to sell their businesses.

Get set up properly

There are a number of criteria to even qualify for the Lifetime Capital Gains Exemption, but if you qualify, this is great news. If you are in a position where you are considering selling your business in the future, you can talk to us about making sure it’s setup properly to qualify! Book an appointment to get started.

Disclaimer:

This article provides information of a general nature only. It is only current at the posting date. It is not updated and it may no longer be current. It does not provide legal or tax advice nor can it or should it be relied upon. All tax situations are specific to each individual. If you have specific tax questions you should book an appointment for a 1 on 1 consultation.