The federal government is proposing several tweaks to the capital gains tax changes that were announced in the federal budget in April, that it says are the result of feedback from entrepreneurs, particularly in the tech and farming sectors.
The changes, which were detailed in draft legislation released August 12, would make farm property eligible for the new Canadian Entrepreneurs’ Incentive, which was announced together with the overall increase of the capital gains tax inclusion rate from one-half to two-thirds, which took effect on June 25, 2024.
The Canadian Entrepreneurs’ Incentive or CEI would be phased in over multiple years to reduce the inclusion rate to one-third on a lifetime maximum of $2 million in capital gains, which Finance Canada says could be combined with the increased $1.25 million Lifetime Capital Gains Exemption.
The federal government announced the following changes to the CEI on Monday “to ensure innovators and small business owners, including farmers, are rewarded for their hard work”:
- Eliminating the founder requirement and reducing ownership requirements: The federal budget announced a requirement that business owners must be a founder who, at all times since founding the company, held 10 per cent or more of all common shares. The government says that following feedback that this ownership requirement may not meet the needs of entrepreneurs, particularly in the tech and farming sectors, it is now proposing to:
- Reduce minimum ownership levels to 5 per cent; and,
- Reduce minimum ownership time to any continuous 24-month period, at any time since the business’ founding, thereby eliminating the requirement to be a founder.
- Reducing the level of engagement requirement: The 2024 budget required business owners must be actively engaged on a regular, continuous, and substantial basis for the five years immediately preceding the sale to receive the incentive. The government says it has since heard that many entrepreneurs may reduce their day-to-day involvement in a company prior to selling and that many business owners choose to sell before five years have elapsed. So instead, the government says it now plans to require a three-year period of active engagement on a regular, continuous, and substantial basis at any time since the founding of the business.
- Expanding eligibility to more small businesses: In the federal budget, the government said small business corporation shares would be eligible property for the incentive, up to $6.25 million. The government says it is now proposing to expand eligibility to all qualified farming and fishing property, and additional small businesses.
- Accelerating rollout: Originally, the CEI was to increase by $200,000 annually over ten years, reaching $2 million by 2034. The government is now proposing to increase the incentive by $400,000 annually to reach $2 million by 2028.
Grain Growers of Canada, one of many farm and business groups that oppose the increased capital gains inclusion rate, say the CEI changes fall short of addressing the increased tax burden on farmers as they go through the process of transferring farm assets to the next generation.
In an Aug. 13 statement, Grain Growers’ says “these revisions do not sufficiently address the substantial impact of raising the capital gains inclusion rate from one-half to two-thirds on primary food producers. Additionally, the added complexity introduced by the CEI, alongside the increased inclusion rate, will drive up accounting and legal expenses for farmers, putting further pressure on their finances.”
The group says “patchwork approaches and fragmented incentives won’t deliver the economic growth and support that Canada’s grain farmers and rural communities need… Most importantly, the government must move away from discouraging the ambitions of our current and future grain farmers and instead partner with them to address the productivity and profitability challenges that impact the agricultural sector. Grain Growers of Canada continues to call on the federal government to revert to the original one-half inclusion rate for intergenerational transfers.”
The draft legislation is open to public comment until September 11, 2024 (by email: [email protected].)
Related:
7 provinces call for immediate reversal of capital gains tax changes
Average grain farm will pay 30% more after capital gains tax changes, says Grain Growers of Canada
