How to Calculate Canada’s New Capital Gains Tax on Selling a Business (2024 Update)

How to Calculate the New Capital Gains Tax on the Sale of Your Business (Canada 2024)

Over the past few weeks, we’ve received an influx of inquiries from clients concerned about how the newly proposed capital gains inclusion rate increase in Budget 2024 will affect their upcoming business sale. The changes are significant, impacting both asset sales and share sales of small businesses in Canada.

There is no way to avoid the increased tax rate unless you complete an estate or corporate freeze before the June 25, 2024, deadline. Even then, only the value at the date of the freeze benefits from the old rate; all future gains will be taxed at the higher inclusion rate. Additionally, a freeze may not be feasible for transactions already underway.

Below, we provide several sample tax calculations to illustrate the differences between the current 50% inclusion rate and the new 66% inclusion rate, along with the impact of the Lifetime Capital Gains Exemption (LCGE) and the Canadian Entrepreneurs Incentive (CEI).

Share Sale – Existing Rates (Before June 25, 2024)

Scenario:
Tom sells all shares of his Qualified Small Business Corporation (QSBC) for $4,000,000.

LCGE (2024): $1,016,836
Inclusion rate: 50%
Province: Ontario
Blended marginal tax rate: 48.06%
Adjusted cost base: $1

Calculation Summary:

Taxable capital gain after LCGE: $2,983,164
50% inclusion: $1,491,582
Tax payable: $716,984.07
Effective tax rate: 18%

Share Sale – New Rates (After June 25, 2024)

Under Budget 2024:

Inclusion rate increases to 66%
LCGE increases to $1,250,000
First $250,000 of gains are still taxed at 50% inclusion

Calculation Summary:

Taxable capital gain after LCGE: $2,750,000
First $250,000 at 50% inclusion: $60,075 tax
Remaining $2,500,000 at 66% inclusion: $792,990 tax
Total tax payable: $853,065
Effective tax rate: 21%

Difference from old rates: $136,080 more tax

Share Sale – With Canadian Entrepreneurs Incentive (CEI)

If the corporation qualifies and the transaction closes in 2025, an additional $200,000 of capital gains may benefit from the 50% rate.

Calculation Summary:

Total taxable gain: $2,750,000
First $450,000 at 50% inclusion (LCGE + CEI): $108,135 tax
Remaining $2,300,000 at 66% inclusion: $729,550 tax
Total tax payable: $837,685

Tax saved due to CEI: $15,379.20

Asset Sale Calculations

Asset Sale – Existing Rates (Before June 25, 2024)

Scenario:
ABC Concrete Inc. sells assets for $4,000,000. Adjusted cost base: $1.

Inclusion rate: 50%
Corporate tax rate on passive income: 50.2%

Calculation Summary:

Taxable gain: $2,000,000
Corporate tax: $1,004,000
RDTOH lowers corporate tax to approx 20%
Amount available for dividend: $1,600,000
Shareholder tax on dividend: $588,719
Total tax payable: $988,719
Effective rate: 25%

Asset Sale – New Rates (After June 25, 2024)

Inclusion rate increases to 66%
No LCGE
No $250,000 at old rate
No CEI

Calculation Summary:

Taxable gain: $2,640,000
Corporate tax: $1,325,280
Effective tax reduced to ~20% with RDTOH
Amount available for dividend: $2,112,000
Shareholder tax on dividend: $790,158
Total tax payable: $1,318,158
Effective rate: 33%

Difference from old rates: $329,439 more tax

Summary of Tax Impacts on a $4,000,000 Sale

Transaction Type	Old Rules Tax	New Rules Tax	Increase
Share Sale	$716,984	$853,065	+$136,080
Asset Sale	$988,719	$1,318,158	+$329,439

The increased inclusion rate significantly affects both share and asset sales. Share sales benefit from exemptions, but asset sales now see substantially higher tax burdens.

Planning to sell your business in 2024 or 2025?

The new capital gains rules could significantly affect your tax bill. Our corporate and tax lawyers can help you structure your transaction, assess your tax exposure, and determine whether a freeze, share sale, or asset sale is most advantageous.

Contact Kalfa Law Firm today to get tailored legal guidance for your business sale.

FAQs:

What is the new capital gains inclusion rate in Canada for 2024?

Starting after June 25, 2024, Canada’s capital gains inclusion rate increases from 50% to 66% for individuals on gains above $250,000 and 66% for corporations and trusts on all gains.

How does the new inclusion rate affect the sale of a business?

The new rate increases taxable capital gains on both share and asset sales. Share sales still benefit from the LCGE and CEI, while asset sales receive no exemptions, resulting in significantly higher taxes.

What is the Lifetime Capital Gains Exemption for 2024?

The LCGE increases to $1,250,000 for qualifying QSBC shares sold after June 25, 2024.

Does the first $250,000 of capital gains still receive the 50% inclusion rate?

Yes. For individuals, the first $250,000 of annual capital gains continues to use the 50% inclusion rate, even after the new rules.

What is the Canadian Entrepreneurs Incentive (CEI)?

The CEI provides an additional $200,000 of capital gains taxed at the old 50% inclusion rate for qualifying entrepreneurs starting in 2025.

Are asset sales eligible for the LCGE or CEI?

No. The LCGE and CEI apply only to share sales, not asset sales.

Should I complete a freeze before June 25, 2024?

A freeze may lock in gains at the lower inclusion rate, but it is not always feasible for deals already in progress. Professional tax or legal advice is required to determine suitability.

-Shira Kalfa, BA, JD, Partner and Founder

Shira Kalfa is the founding partner of Kalfa Law Firm. Shira’s practice is focused in corporate-commercial and private M&A law including corporate reorganizations, corporate restructuring, mergers and acquisitions, commercial financing, secured lending and transactional law.

The above provides information of a general nature only. This does not constitute legal or accounting advice. All transactions or circumstances vary, and specified legal advice is required to meet your particular needs. If you have a legal question you should consult with a lawyer.