For many Canadians, the April 2024 Federal Budget brought some bad news with the increase of the inclusion rate on capital gains from 50% to 66.67%, effective June 25, 2024.
But the Federal Government also introduced some changes to help certain business owners reduce their tax burden when they sell the shares of their active business corporation.
- the 2024 Budget increased the lifetime capital gains deduction for sales of shares of active business corporations (technically defined as “small business corporation shares”) to $1.25 million per individual. The previous program was capped at $1 million. This means that an individual shareholder selling shares of their active business corporation will now have a lifetime limit of $1.25 million that will be tax free. This applies to each shareholder, so if a business is owned by 4 family members, there is a potential of $5 million that is exempt from capital gains tax.
- The 2024 Budget also introduced a new program called the Canadian Entrepreneurs Incentive (“CEI”). This program allows individuals who sell shares of certain active businesses to obtain a more favourable capital gains tax rate for up to $2 million. Under the CEI, the capital gains inclusion rate is reduced to 33.33% up to $2 million. If this is combined with the lifetime capital gains deduction, the individual could save tax on up to $3.25 million of sale proceeds.
- The eligibility rules for the CEI were enhanced by an announcement on August 12, 2024. Under the announcement, the ownership of the eligible business shares being sold was reduced from 10% to 5%, the requirement to be a founding shareholder was dropped and instead the minimum ownership time was reduced to any continuous 24-month period since the business was founded, and the requirement for the shareholder to be actively engaged in the business on a regular and continuous basis for 5 years has been reduced to any 3-year period since the business was founded.
These incentives will help to reduce capital gains tax for shareholders who sell the shares of active businesses’ corporations. This is not for every business and there are certain qualifications that apply, but if you are planning a sale of your business, or if you would like to restructure your business to qualify for these new incentives, please contact me.
If you have any questions regarding how the recent Federal Government changes may effect your business or holdings, please contact Thomas Fellhauer, K.C. at 250-869-1165 or [email protected].
