The proposed federal budget was released in April, and there has been a lot of talk about what the changes, particularly to capital gains tax, will mean for Canadians.

 

According to Dan Kelly, President and CEO of the Canadian Federation of Independent Business (CFIB), the proposed budget changes are creating a stir in the business community, but not all of it is bad. But good, bad, or ugly, they will likely be big issues heading into next year’s election.

 

For entrepreneurs with retirement on the horizon, the process will be a lot more complicated than simply notifying their employer that they are starting their next chapter. For many business owners, retiring means selling their company, whether to family, friends, employees, or even their competition. Selling a business can be one of the biggest wealth transfers in your lifetime, and you cannot forget to consider the tax implications.

 

If you are an entrepreneur who plans on owning your business for many years, Kelly says it is a bad news story. The budget increases the capital gains inclusion rate from 50% to 66.7%, which means that any gains within your company will be subject to a higher rate of tax. And to make matters worse, businesses are not able to take advantage of the lower rate of 50% on the first $250,000 of annual capital gains like individual taxpayers are.

 

The good news is if you are a business owner who is looking to sell your company. The government has proposed a significant bump in the Lifetime Capital Gains Exemption (LCGE). The $1 million exemption for small businesses selling shares or assets will rise to $1.25 million as of June 25, 2024. That is something Kelly and the CFIB have been advocating for for a long time.

 

Another change that is getting mixed reviews is the new Canada Entrepreneurs’ Incentive (CEI), which will lower capital gains taxes on the next $2 million upon the sale of small business shares. For businesses that qualify, there will be no tax on the first $1.25 million of shares sold, and the next $2 million will be subject to a 33% inclusion rate, significantly lower than the current rate of 50%.

 

But here’s the catch: many business sectors, including restaurants, hotels, finance, insurance, real estate, and professional corporations, will not qualify for this incentive. Kelly says there seems to be no rhyme or reason as to why some businesses qualify while others do not. The CFIB is actively lobbying the government to include all entrepreneurs regardless of sector.

 

While business owners are having to make some big decisions before the changes take effect on June 25th, Kelly points out that they have yet to receive the new rules in writing, let alone formal legislation from the government. That means there is still time to make your voice heard. Stay informed. Connect with organizations like the CFIB who advocate for Canadian businesses. And reach out to your local MP or MLA to ask them to take action.