Understanding the 2024 Federal Budget: Changes to Capital Gains & Support for Entrepreneurs

 

The 2024 Canadian Federal Budget introduces substantial reforms aimed at enhancing the nation’s economic resilience and fostering entrepreneurial spirit. Here’s a straightforward breakdown of the significant changes to the capital gains tax regime and the introduction of the Canadian Entrepreneurs’ Incentive.

 

Major Revisions to Capital Gains Taxation

 

  • Increase in Capital Gains Inclusion Rate:
    • Current Law: Only 50% of the gain from the sale of capital property (excluding principal residences) is taxable.
    • 2024 Changes: From June 25, 2024, the inclusion rate for capital gains will increase to 66.7%. This new rate affects all gains realized by corporations and trusts from this date onward, aligning with efforts to boost tax revenue from high-value transactions​.

 

  • Special Consideration for Individuals:
    • Individuals benefit from a $250,000 exemption, where gains up to this amount realized post-June 25, 2024, will still be taxed at the current 50% rate. Any gain exceeding this threshold will be taxed at the new 66.7% rate, impacting particularly high-income earners and those planning significant asset sales​​.

 

  • Enhanced Lifetime Capital Gains Exemption (LCGE):
    • The LCGE will increase to $1.25 million effective June 25, 2024, benefiting individuals selling shares of qualifying small businesses or certain agricultural or fishing properties.

 

Canadian Entrepreneurs’ Incentive: A Boon for Business Owners

The Canadian Entrepreneurs’ Incentive marks a pivotal advancement to support the country’s innovative minds. Here’s how it works:

 

  • Reduced Tax Burden:
      • This incentive offers a capital gains inclusion rate of one-third for qualifying dispositions, substantially lower than the upcoming general rate of two-thirds. Entrepreneurs selling their business shares will thus include only one-third of the gain in their taxable income, significantly lowering their tax liabilities on these gains​.

 

  • Lifetime Cap:
    • There is a lifetime limit of $2 million in capital gains per individual that can benefit from this reduced rate. This limit will be phased in gradually, starting with $200,000 in 2025 and increasing annually until it reaches the full $2 million by 2034, encouraging sustained entrepreneurship​.

 

  • Eligibility Requirements:
    • To qualify, the shares sold must belong to a Canadian-Controlled Private Corporation primarily engaged in active business within Canada. The seller needs to be a founding investor who has held the shares for at least five years and been actively involved in the business. This initiative is aimed at fostering domestic innovation and business growth while excluding certain sectors like financial services and real estate​​.

 

For small to medium-sized business owners, these changes emphasize the need for strategic planning with respect to the timing of selling business assets and understanding the nuances of the new tax rules released in the federal budget. Engaging with financial and tax advisors to navigate these changes will be crucial in maximizing the financial outcomes of selling a business and potentially reinvesting in new entrepreneurial ventures.

 

For the full 2024 Federal Budget, click here.

 

Disclaimer: This content is for informational and highlight purposes only and should not be construed as tax or legal advice. For specific advice pertaining to your unique situation, please consult a professional.