The Liberal government is making some changes to a capital gains tax exemption applied when a business owner sells their shares, but advocates say it doesn’t go far enough.
April’s federal budget announced an increase to the taxable “inclusion rate” on capital gains — the profits that individuals or businesses make from selling an asset like a stock or a second home.
The new rules increased the inclusion rate from one-half to two-thirds on capital gains above $250,000 for individuals, and on all capital gains earned by corporations and trusts.
The budget also announced a reduction in the inclusion rate when an individual sells shares they own in their business. Dubbed the ‘Canada Entrepreneurs’ Incentive’ (CEI), the exemption reduces the capital gains inclusion rate to 33 per cent on a lifetime maximum of $2 million.
But on Monday, the government announced it was making changes to the business exemption by expanding its eligibility and speeding up its rollout.
The budget stated that only founding members of a business who hold 10 per cent or more of its shares would be eligible for the exemption. The government is now eliminating the founder requirement and reducing the ownership level requirement to 5 per cent.
The amount of time an owner has to be active in the day-to-day operations of their business in order to benefit from the exemption has been reduced from five years to three.
The $2 million cap was also supposed to be phased in over a ten years, but is now set to be phased in over five — increasing by $400,000 per year. The sale of fishing and farming property will now also qualify for the exemption.
But business advocates argue that the exemption for owners’ shares doesn’t offset the overall increase to the capital gains inclusion rate.
WATCH | Changes to the capital gains tax:
“The tweaks to the CEI announced [Monday] fall short of addressing the harm caused by the government’s tax plans on Canada’s innovation economy,” Benjamin Bergen, president of the Council of Canadian Innovators, said in a media statement.
Bergen said his organization is calling on the government to reverse the changes altogether and warned that not doing so would scare off potential investors.
“It’s time for the government to stop taxing ambition and start working with innovators to tackle Canada’s productivity and prosperity challenges,” he said. “The current path is not just misguided — it’s a dead end.”
Dan Kelly, president and CEO of the Canadian Federation of Independent Business, said the changes to the exemption were “good moves” but didn’t go far enough.
“It appears hundreds of thousands of small businesses will continue to be specifically excluded, including owners of restaurants, hotels, as well as those in finance, insurance, real estate, arts, entertainment, recreation, and professionals like doctors, lawyers, accountants,” Kelly said in a media statement.
Kelly also argued that the changes won’t “fully offset” the increase to the overall inclusion rate. He also questioned why the expansion of the business exemption would apply to property assets for fishers and farmers, but not others.
Farmers and farming advocates have also been raising concerns about the overall changes to the capital gains tax. One of the main concerns relates to the sale of farm land, which many farmers factor into their retirement plans.
Although the government seems to have addressed that concern by including farming property in the business exemption, the Grain Growers of Canada said the changes still won’t address the overall impact of the inclusion rate increase.
“Patchwork approaches and fragmented incentives won’t deliver the economic growth and support that Canada’s grain farmers and rural communities need,” the organization said in a media statement.
The changes to the capital gains tax took effect in June through a ways and means motion, but the government will still need to pass legislation. A draft of the bill was made public on Monday and the government has launched consultations on its proposal.
