Ottawa's revisions to the Canadian Entrepreneur Incentive still leave many small businesses facing higher taxes
Ottawa's recent adjustments to the Canadian Entrepreneur Incentive (CEI) have drawn mixed reactions from business groups, as reported by The Globe and Mail.
These business groups argue that the changes do not sufficiently reduce the tax burden on small business owners and entrepreneurs.
The federal government introduced the CEI as part of its spring budget to offset broader increases in capital-gains taxes. The CEI lowers the capital-gains taxes that eligible business owners pay when selling their companies, with profits up to a lifetime maximum of $2m.
The government has recently expanded the program to include individuals selling agriculture and fishing properties, who were previously excluded, and has relaxed several other eligibility requirements.
Despite these changes, many small businesses still face a higher tax burden when selling their companies. The Liberal government increased the inclusion rate on capital gains—the proportion of the gain subject to tax—from 50 percent to 66 percent for businesses.
This rate also applies to individuals on annual capital gains exceeding $250,000. The government justifies this increase as necessary to fund public investments in housing and other affordability initiatives.
However, the business community has expressed significant concern, warning that these changes could discourage investment and entrepreneurship.
The recent tweaks to the CEI reflect the Department of Finance's willingness to address some criticisms. The requirement that a person must be a company founder to qualify for CEI benefits has been removed, and ownership requirements have been reduced.
Additionally, the program will now expand at a faster rate, with the incentive increasing by $400,000 annually instead of $200,000, reaching the full $2m incentive level by 2029.
Dan Kelly, head of the Canadian Federation of Independent Businesses, acknowledged that the CEI will reduce the tax burden for many of his members, particularly those selling businesses for less than $6.25m.
The CEI reduces the inclusion rate to 33 percent from the standard 50 percent on profits up to $2m. This is in addition to an outright capital-gains tax exemption for small business owners, which was increased from $1m to $1.25m in the spring budget.
Kelly praised the expansion of the CEI to a broader range of businesses and individuals, but noted that many sectors, including doctors' offices, restaurants, hotels, and real estate firms, remain excluded.
“It is unfair and deeply disappointing that the government didn’t open it up to every sector of the economy in the same way,” Kelly said.
He added that the changes do not address the overarching concern about the increased capital-gains inclusion rate, leaving the overall package as “a big net negative for small business owners.”
Doctors, who were among the most vocal opponents of the capital-gains tax changes in the spring budget, are particularly dissatisfied with the CEI.
The Canadian Medical Association stated that the changes do not address their concerns, noting that incorporated physicians will likely not benefit from the incentive.
The association continues to press the government to apply the old 50 percent inclusion rate on capital gains earned by professional medical corporations for gains under $250,000.
Farmers, on the other hand, are among the key beneficiaries of the recent changes to the CEI. Those selling farms for profits under $6.25m should theoretically face a lower tax burden compared to the previous system.
Representatives from farm lobby groups, including the Grain Growers of Canada, the Canadian Federation of Agriculture, and the Ontario Federation of Agriculture, have welcomed the changes but remain concerned that most farmers are still worse off than they were under the 50 percent capital-gains inclusion rate.
Grain farmers, in particular, face large potential capital-gains liabilities due to the increased value of their land.
Ben Bergen, head of the Council of Canadian Innovators, welcomed the removal of the founders' requirement but pointed out that venture-capital investors and highly skilled tech workers, who primarily earn income through stock options, still do not benefit from the CEI.
“The changes that they made are poking founders less in the eye, but they’re still getting poked in the eye. It’s doing nothing to help talent and capital,” he said.
Katherine Cuplinskas, a spokesperson for Finance Minister Chrystia Freeland, defended the government's actions, stating that the changes were aimed at making the tax system fairer, which she described as “the fiscally responsible thing to do.”
