To start and scale a business, entrepreneurs require substantial capital for investments in workforce, technology, and infrastructure. To that end, the 2024 federal budget introduced a new Canadian Entrepreneurs’ Incentive (CEI) aimed at driving economic growth and boosting productivity, but the draft severely misses the mark.
Professional corporations don't qualify. Neither do businesses in the financial services, insurance, real estate, food and accommodation, arts, recreation and entertainment, and consulting sectors — effectively excluding all but very niche entrepreneurs.
First announced in April along with the capital gains inclusion rate (CGIR) hike from 50% to 66.67% for corporations and trusts, and for individuals on net capital gains exceeding $250,000 annually, the program has undergone some revisions since its debut. Here’s what you need to know.
Key Features of the Revised Canadian Entrepreneurs’ Incentive
The CEI is designed to “stimulate entrepreneurial activity” by offering a suite of benefits tailored to business owners. One of the most significant draft updates is the adjustment to the capital gains tax treatment. Qualifying entrepreneurs can now benefit from a reduced inclusion rate of one-third on a lifetime maximum of $2 million in eligible capital gains. This adjustment, in conjunction with the enhanced $1.25 million Lifetime Capital Gains Exemption (LCGE), enables select business owners to benefit from at least $3.25 million in total and partial lifetime capital gains exemptions.
Changes to Founder and Ownership Requirements
Based on feedback from entrepreneurs, especially in tech, the government is now dropping the founder requirement and proposing lowering the ownership requirement from 10% to 5%. The minimum ownership period has also been reduced to any continuous 24-month period since the company was founded.
Amendments to Engagement Requirements
Budget 2024 initially required business owners to be actively engaged with the company on a regular, continuous, and substantial basis for the five years prior to selling to benefit from the incentive. Due to the reality of reduced involvement during the end stages or choosing to sell sooner, the period of active engagement has now been lowered to any combined three-year period since inception.
Accelerated Rollout
Recent updates to the draft legislation accelerate the incentive’s rollout by doubling the annual increase to $400,000, achieving the $2 million goal by 2029 instead of 2034.
Source: Investment Executive
The example illustrates a difference of $333,400 in savings when utilizing the CEI.
Source: Canadian Government
The breakeven point for fully benefitting from the incentive is $6.25 million in capital gains. Below $6.25 million, individuals will find themselves better off from the CEI, LCGE, and $250,000 personal exemption compared to before. However, if their capital gains exceed $6.25 million, they will end up paying more in taxes than they would have under the old system.
BOTTOM LINE
At SANDSTONE, we specialize in providing tailored financial strategies for entrepreneurs. Our expertise in navigating complex tax implications and optimizing wealth management solutions can help you make the most of the Canadian Entrepreneurs' Incentive. Whether you’re looking to leverage opportunities in income splitting, take advantage of the capital gains exemptions, or explore family wealth transfers through gifting or selling business interests to family members or trusts, our team is here to provide personalized advice and support.