Capital Gains Changes:
What it means for your business

Capital Gains Changes: What it means for your business

In its spring budget, the federal government announced four big capital gains changes:

1. A significant bump in the Lifetime Capital Gains Exemption (LCGE) to $1.25 million: The $1 million LCGE for sales of small business shares or assets for fishers and farmers will rise to $1.25 million as of June 25, 2024. It will be indexed to inflation starting in 2026. This was a high priority recommendation from CFIB for many years.  
2. For individuals, a hike in the inclusion rate from 50% to 66.7% for capital gains above $250,000 each year. Importantly, owners selling their businesses will also get $250,000 at a 50% inclusion rate, which can be combined with the LCGE and CEI.
3. For corporations, a hike in the inclusion rate from 50% to 66.7% for all capital gains, with no lower rate on the first $250,000. This applies when the business itself has capital gains on investments or property. Owners selling their businesses have the benefits described in this note. 
4. A new Canada Entrepreneurs’ Incentive (CEI) to lower capital gains taxes on the next $2 million upon sale of qualifying small business shares: This new incentive will start at $200,000 in 2025 and rise by $200,000 each year over the next 10 years before it reaches $2 million in 2034. Qualifying entrepreneurs will pay income taxes on 33.3% of their capital gains rather than the new 66.7% inclusion. Sadly, many business sectors will not qualify (restaurants, hotels, arts, entertainment, recreation, personal services, finance, insurance, real estate firms and professional corporations). 

In June, the government added more details for all of these changes. While the government still has to introduce legislation for the new rules, the changes to the LCGE and inclusion rate are in effect as of June 25, 2024.

More recently, the government announced that the proposed CEI would now be phased in over 5 years, not 10, and would extend to non-founders as well as those selling farm and fishing assets. These are changes that CFIB was advocating for.

What that means for your business

Upon the sale of an incorporated business in most sectors, business owners can stack these benefits. When fully implemented, the marginal inclusion rate for a sale of a business will be:

Taxable capital gains upon sale of shares of a small business, Canada

NOTE: Does not account for indexation of the LCGE as of 2026. 

Taxable capital gains on property, investments held in a corporation:

NOTE: There is no $250,000 allowance at 50% inclusion for sales of investments or properties held within a corporation

These changes create many winners and losers in the business community:

No impact:

• Selling shares of an incorporated business (or assets of a farm/fishing operation) under $1 million. 

Winners:

• Selling shares of an incorporated business (or assets of a farm/fishing operation) between $1 million and $2.25 million, starting June 25^th, 2024.
• Over time, selling shares of an incorporated businesses (or assets of a farm/fishing operation) in most sectors under*:
  
  • $3.05 million starting in 2025
  • $6.25 million starting in 2029

*Compared to the $1 million dollar in the LCGE available to farm and fish properties from 2016 to 2023. Does not account for indexation of the LCGE as of 2026.

Losers:

• Those with capital gains on investments in other properties or stocks within the company intended for retirement or reinvestment.
• Selling an incorporated business over $6.25 million in 2029 (or over lower levels over the next 5 years).
• Selling an incorporated business above $2.25 million in the following sectors: 
  
  • restaurants
  • hotels 
  • arts, entertainment, recreation
  • finance, insurance, real estate firms
  • professional corporations like doctors, lawyers' offices

Example: An owner selling shares of his/her business for $2 million:

WHERE DOES CFIB GO FROM HERE?

One of CFIB’s founding victories is the Lifetime Capital Gains Exemption for entrepreneurs. Most entrepreneurs don’t have pensions and rely on the ultimate sale of their business, together with the protection of the LCGE, as their retirement plan. CFIB has fought off several attacks to this important tax policy over the years and has lobbied hard for every increase, including the one announced in the 2024 budget.

The concept of the new Canadian Entrepreneurs’ Incentive is a positive one as it will allow most businesses a lower capital gains inclusion rate on the next $2 million upon a sale when fully implemented. However, CFIB will be lobbying hard to improve this initiative, including making it accessible to ALL entrepreneurs.

CFIB is deeply concerned about the increase of the overall inclusion rate from 50% to 67%. This will serve to discourage investment, demotivate Canadians from getting into business in the first place or working hard to grow a small business to a medium-sized business. Also, as many businesses rely on some other forms of investment or property held in the corporation, the higher capital gains tax will make them more vulnerable to bad economic times. During the pandemic, many business owners were fortunate to have other forms of investments in their corporation to help them get through lockdowns. 

CFIB is asking government to:

1. Scrap the planned increase in the general inclusion rate to 66.7%. If government is unwilling to abandon this plan, it should: 
   • Grandfather all existing capital gains using a V-Day (valuation day) as was done in 1971 
   • Allow corporations to benefit from $250,000 each year at 50% inclusion like individuals 
   • Allow for 5-year income averaging to benefit from the $250,000 annual threshold for larger capital gains for irregular events, like selling a property  
2. Expand the new Canadian Entrepreneurs’ Incentive to include entrepreneurs in all sectors.

We welcome your input on these changes. Please send ideas and concerns to: capitalgains@cfib.ca 

Dan Kelly
CFIB President