Canada’s 2024 Federal Budget – Impact on Taxation of the Sale of a Business
On April 16, 2024, the Deputy Prime Minister and Minister of Finance released Budget 2024, introducing some of the most significant tax changes affecting the sale of small-to-medium-sized businesses (SMEs) in recent years. These updates directly impact private M&A transactions, business owners preparing for exit, and anyone planning to sell shares or assets of a corporation.
This article breaks down the key tax changes proposed in Budget 2024 and explains how they affect business owners and entrepreneurs.
1. Increase to the Capital Gains Inclusion Rate
Under current rules, 50% of capital gains are included in an individual’s taxable income. For example, a $100 capital gain results in $50 of taxable income. Assuming an average combined personal tax rate of 38%, the tax payable would be $19, leaving $81 in the taxpayer’s hands.
What Budget 2024 Changes
Effective June 25, 2024, the inclusion rate increases to:
- 66.67% for capital gains
- Applies to both gains and losses
Using the same $100 gain example:
- $66.66 becomes taxable income
- At a 38% marginal rate, tax increases to $25.33
- Leaving $74.66 after tax
While this may seem marginal, the increase becomes substantial when applied to large transactions such as the sale of a business.
The $250,000 Annual Threshold
Individuals benefit from a $250,000 annual threshold, where:
- The first $250,000 of capital gains remains taxed at the 50% inclusion rate
- Gains above $250,000 are taxed at the 66.67% rate
- The threshold applies after accounting for the LCGE, the CEI, and capital losses
2. Lifetime Capital Gains Exemption (LCGE) Increase
The LCGE allows individuals to shelter capital gains arising from the disposition of qualified small business corporation (QSBC) shares.
What’s New in Budget 2024
- LCGE increases from $1,016,836 to $1,250,000
- Applies to sales occurring on or after June 25, 2024
- Indexed for inflation starting in 2026
This increase provides meaningful tax relief for business owners selling QSBC shares.
3. Introduction of the Canadian Entrepreneurs’ Incentive (CEI)
Budget 2024 introduces the Canadian Entrepreneurs’ Incentive (CEI), designed to reward founders who actively participated in building their businesses.
How It Works
The CEI reduces the taxable portion of qualifying capital gains by cutting the inclusion rate in half.
Instead of being taxed at 66.67%, qualifying gains are taxed at 33.33%.
Example Scenario
A business owner sells qualifying shares for $2,000,000:
- First $1,250,000 sheltered under the LCGE
- Remaining $750,000 taxable capital gain
- First $200,000 taxed at the reduced CEI rate (33%)
- Remaining $550,000 taxed at 66.67%
CEI Lifetime Limit
- Starts at $200,000 of eligible gains in 2025
- Increases by $200,000 annually
- Caps at $2 million in 2034
CEI Eligibility Requirements
To qualify, the taxpayer must meet all of the following:
- Shares were directly owned at time of salet
- Shares qualify as QSBC shares
- Taxpayer was a founding investor
- Shares held for at least 5 years
- Taxpayer held 10%+ of votes and fair market value
- Taxpayer was actively engaged in the business on a regular, continuous, and substantial basis for 5 years
- Shares were issued for fair market value
Exclusions
CEI does not apply to shares of:
- Professional corporations (e.g., lawyers, doctors, accountants)
- Corporations whose value derives from employee skill or reputation
- Businesses in financial services, insurance, real estate, food & accommodation, arts, recreation, or entertainment
- Corporations offering consulting or personal care services
4. Employee Ownership Trust (EOT) Capital Gains Exemption
Budget 2024 builds on the Employee Ownership Trust rules introduced in 2023 to facilitate employee acquisition of businesses.
A proposed $10 million capital gains exemption applies where strict conditions are met.
Key Conditions
The exemption is available if:
- The corporation is not a professional corporation
- The sale qualifies as a Qualifying Business Transfer (QBT)
- The acquiring trust is a new EOT
- Ownership tests are met for 24 months prior
- Over 50% of assets were used in an active business
- The seller or spouse was actively engaged in the business for 24 months
- At least 90% of EOT beneficiaries are Canadian residents
- No disqualifying event occurs within 36 months
Timing
This exemption applies to qualifying sales between:
January 1, 2024 – December 31, 2026
Conclusion
The tax reforms introduced in Canada’s 2024 Federal Budget significantly impact business owners planning to sell shares or assets.
For share sales, changes to the inclusion rate, the increased LCGE, and the new CEI create both opportunities and complexities.
For asset sales, corporations face a higher inclusion rate with no available relief measures.
Understanding these changes is essential for business owners planning for succession, retirement, or a strategic exit.
Planning to sell your business or need tax-efficient restructuring advice?
Speak with one of Kalfa Law Firm’s experienced business lawyers to ensure you maximize available exemptions and structure your sale strategically. Contact our team today to schedule a consultation.
FAQs:
-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.
© Kalfa Law 2024
The above provides information of a general nature only. This does not constitute legal 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.
