Budget 2024's 'Canadian Entrepreneurs' Incentive' - A Boost for Business Owners

Credits: Entrepreneurs to get tax break on capital gains inclusion

The new tax break aims to reward entrepreneurial risk-taking and ease the burden when exiting a business.

In a move to support Canada's entrepreneurial backbone, the federal government's latest budget includes a significant tax incentive for business owners. The newly proposed 'Canadian Entrepreneurs' Incentive' promises to reduce the tax burden on capital gains realized from selling a qualifying small business.

The Incentive in Brief

Under the plan, entrepreneurs will benefit from a lower capital gains inclusion rate of one-third (33.3%) on up to $2 million in eligible gains from the sale of their business. This is a substantial reduction from the proposed increased general inclusion rate of two-thirds.?

Additionally, the Lifetime Capital Gains Exemption (LCGE) will be increased to $1.25 million from the current $1,016,836. Combined, these measures effectively provide entrepreneurs exiting their businesses with a total exemption of at least $3.25 million.

"Entrepreneurs with eligible capital gains of up to $6.25 million will be better off under these changes," the budget states, noting that the actual benefit could be even higher due to future inflation adjustments and the ability to spread gains over multiple years.

A Well-Deserved Reward

The incentive acknowledges the immense risks and sacrifices entrepreneurs undertake in pursuit of their business dreams. Jamie Golombek, Managing Director of Tax and Estate Planning at CIBC Private Wealth, highlights the potential impact: "The combination of the indexed LCGE with the incentive could mean millions of dollars of potential low-tax or no-tax capital gain on the sale of a qualifying small business corporation."

The government aims to ensure entrepreneurs "benefit from the fruits of their hard work" by easing the tax burden on the sale of their life's work, as stated in the budget.

Eligibility and Phase-In

The incentive will be available to founding investors in certain sectors who own at least 10% of shares in their business and have been principally employed by the company for at least five years. However, various industries, including financial services, real estate, consulting, and personal care services, are excluded from eligibility.

Brian Ernewein, Senior Advisor at KPMG LLP, notes concerns about the exclusions, stating, "I don't know necessarily that it's right to … discriminate against them." He anticipates further discussions to clarify the eligibility criteria.

The lifetime limit of $2 million in eligible capital gains will be phased in at $200,000 per year, beginning on January 1, 2025, and reaching the full amount by January 1, 2034.

While the details and implementation may require refinement, the Canadian Entrepreneurs' Incentive represents a significant step in supporting the risk-takers and job creators who drive economic growth and innovation in Canada.

Navigating the New Tax Landscape

While the Entrepreneurs' Incentive provides relief for business owners, Budget 2024's broader capital gains tax hike and market volatility present new challenges for high-net-worth investors. In this environment, prudent individuals may want to consider diversifying into tax-efficient alternative assets like private equity, private real estate, flow-through tax structures, and tax-sheltered corporate insurance strategies. These specialized asset classes can produce returns uncorrelated to public markets while optimizing tax efficiency or even providing government-sanctioned tax shelters.

Now is an ideal time to seek comprehensive wealth planning guidance from an experienced private wealth advisor adept at constructing tax-efficient wealth strategies. Their expertise can help mitigate risks, maximize tax advantages, and identify unique yield opportunities amid the shifting tax regime and market uncertainty.

A Partnership for Holistic Wealth Management

I have partnered with one of Canada's leading private wealth management firms serving high-net-worth clients nationwide. This firm offers professional investment management and comprehensive wealth planning from a client-first perspective, providing affluent Canadians access to sophisticated strategies and solutions usually reserved for the ultra-affluent.

Driven by a "capital preservation first" philosophy, the firm generates consistent, tax-efficient returns uncorrelated to public markets. My clients gain exclusive access to alternative investments such as private equity, private real estate, government-sanctioned flow-through tax structures, and tax-sheltered corporate insurance solutions.

Complimentary Portfolio Evaluation

As a valued reader, we are offering a complimentary portfolio evaluation to confirm if your portfolio is positioned to weather the 2024 budget changes.

Email me at [email protected] or use my Calendly Link to book your complimentary portfolio evaluation.

During this no-obligation consultation, we can provide insights into how we can help you navigate the 2024 budget changes to ensure your portfolio is resilient to the tax changes and aligned with your long-term financial goals.

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