The House of Commons rose this week without passing the package of proposed capital gains tax changes.Adrian Wyld/The Canadian Press
Two measures meant to provide small business owners with relief from the federal government’s proposed hike to the capital gains inclusion rate haven’t yet passed into law, resulting in uncertainty for Canadians who recently sold their businesses or are looking to do so next year.
In the 2024 budget, the federal government proposed increasing the lifetime capital gains exemption (LCGE) on the sale of small business shares and farming and fishing property to $1.25-million, up from $1,016,836. (The exemption amount for 2025 is also $1.25-million, indexed annually to inflation again starting in 2026.)
Ottawa also proposed introducing the new Canadian Entrepreneurs’ Incentive (CEI), which gives certain business owners access to a one-third capital gains inclusion rate on the next $2-million in capital gains when fully implemented.
Under the proposals, the hike to the LCGE amount became effective June 25, 2024, while the CEI becomes effective Jan. 1, 2025.
However, the House of Commons rose for the holiday break on Tuesday without enacting either measure. Parliament also hasn’t passed the increase to the capital gains inclusion rate to 66.7 per cent from 50 per cent, which became effective June 25.
The House doesn’t sit again until Jan. 27, 2025.
The lack of progress on the package of capital gains measures creates confusion for business owners negotiating a sale of their business, says Armando Minicucci, partner, tax, with Doane Grant Thornton LLP in Mississauga.
“You’re going into a very stressful transaction to sell the shares of your private company and there’s all this uncertainty about how much [you’re] going to be left with after taxes once all is said and done,” Mr. Minicucci says.
Clients generally decide whether to proceed with an offer based on the projected after-tax proceeds, not the gross proceeds, he says.
Ameer Abdulla, partner, tax, at EY Private in Waterloo, Ont., says the proposed hike to the capital gains inclusion rate, the increase to the LCGE amount and the introduction of the new CEI should be viewed as three parts of one “bundle” of complementary measures.
Indeed, the government reaffirmed in its Fall Economic Statement tabled in the House on Monday that it intended to move forward with all three measures.
Mr. Abdulla says he’s advising clients to file returns and pay any taxes based on the assumption the proposed hike to the capital gains inclusion rate will eventually pass into law, as that’s the CRA’s administrative position.
“Where one is filing on the basis that one element of that bundle is live, i.e. the increased capital gains inclusion rate, then it would be fair to proceed on advice and filing [on the basis] that all three components of the bundle are live,” Mr. Abdulla says.
The CRA didn’t respond by press time to questions about how it’s administering the proposed changes to the LCGE and the introduction of the CEI.
Under the budget proposal, a business owner who sold their business between June 25 and Dec. 31 would be eligible to access the proposed higher exemption amount on their 2024 individual tax return, due April 30, 2025.
The government tabled a notice of ways and means motion on Sept. 23 that included legislation to hike the capital gains inclusion rate and increase the exemption amount, but that measure didn’t come to a vote.
Meanwhile, draft legislation for the CEI hasn’t been tabled. The proposed incentive would reduce the capital gains inclusion rate to 33.3 per cent from the proposed 66.7 per cent under the broader rules on a lifetime maximum of $2-million in eligible capital gains.
As originally proposed, the lifetime limit for the incentive was to be phased in at $200,000 a year from 2025 to 2034. The CEI would be available to founders in certain sectors who owned at least 10 per cent of shares in their business and if the company had been their principal employment for at least five years.
In August, the government released draft legislation that enhanced the incentive program, doubling the annual phase-in to $400,000 so that the $2-million threshold would be reached by 2029.
The draft legislation also removed the requirement that a business owner be its founder by reducing the period of “active engagement” in the business to any three-year period, and reduced the share ownership minimum requirement to 5 per cent. It also extended eligibility to owners of farming and fishing property, but continued to exclude from eligibility owners of professional corporations.
Under the draft legislation, an individual could claim the incentive on up to $400,000 of capital gains realized on a transaction next year on their 2025 tax return, due April 30, 2026.
Eligible business owners could access both the LCGE and the CEI in addition to having access to the annual $250,000 threshold available to individuals, under which capital gains remain subject to the 50 per cent inclusion rate.
Once the CEI is fully implemented, the Department of Finance estimates that an entrepreneur would be better off when combining the LCGE, the CEI and the $250,000 threshold under the proposed capital gains tax regime for gains up to $6.25-million. Above that amount, entrepreneurs will have more tax owing under the new capital gains tax regime.
Under the Aug. 12 draft legislation, the government seems to have tried to align the eligibility requirements for the CEI with those of the LCGE, which was not the case when the incentive was first proposed in the budget, Mr. Abdulla says.
“Many of the same types of businesses or entrepreneurs who would benefit from one [program] would likely benefit from the other, so do they do stack,” he says.