Capital Gains Changes:
What it means for your business

On Tuesday, January 7, the Canada Revenue Agency (CRA) announced that it will continue to collect taxes based on the higher 66.7% capital gains inclusion rate, despite the lack of any legislation from Parliament: https://www.canada.ca/en/revenue-agency/news/newsroom/tax-tips/tax-tips-2025/top-changes-affecting-business-taxes-2025.html 

CFIB understands that the CRA’s original decision to levy the higher rate as of June 25th based on the 2024 budget proposal, however, the circumstances allowing CRA to use this convention have fundamentally changed: 

1. Nearly 9 months after the April budget, no legislation was ever presented to Parliament.
2. The Minister of Finance resigned last month, and the Prime Minister has announced his impending resignation.
3. Parliament has been prorogued.
4. Opposition parties have said they no longer have confidence in the government and will push for an election as early as possible.
5. Even assuming the current Liberal government (or even a new Prime Minister/Finance Minister) tries to introduce legislation as soon as Parliament reconvenes, it is hard to imagine this passing before an election.
6. As the Conservatives have stated that they oppose the increase in capital gains taxation, it seems unlikely they would introduce such legislation upon taking office should they win the election.  
   

However, the CRA says:

"Upon resumption of Parliament, if no bill is passed in the House of Commons, and the government signals its intent to not proceed with the proposed measures, the CRA would cease to administer them." 

This political purgatory is untenable. CFIB is looking at the legality of CRA's position to date and  is calling on the agency to revert to the earlier rules, pending a legislative change.

CFIB is also calling on Finance Minister LeBlanc to step in and immediately resolve this issue and for all opposition leaders to make clear what they will do should they take office.

Under the status quo, the CRA will collect billions in capital gains taxes (with no legislation authorizing it) until a government officially tells it to stop. This means that it could be a long time before any clarity is provided to taxpayers. 

We expect small business owners and Canadians with capital gains will not have clarity for another year or more. This not only is deeply unfair and disrespectful to Canadians that have important transactions ahead, not to mention those who rushed to sell businesses or assets in advance of June 25, 2024, but also creates significant uncertainty for investors looking to invest in Canada and in Canadian businesses. 

With all the political and economic uncertainty in Canada at this moment, governments should be working to provide as much clarity as possible - particularly to Canada's job creators.

Dan Kelly
CFIB President

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

CFIB shared its disappointment that the federal government did not make amendments to its proposed changes to capital gains taxation - read more.

Please see the government's newest release on capital gains here.