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Capital Gains Changes: Impacting Taxpayers and Business Owners

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Since the proposed federal budget was released in April, there has been a lot of talk about what the changes—particularly to capital gains tax—will mean for Canadians.

For entrepreneurs thinking about retirement, the process will be a lot more complicated than simply notifying their employer that they will be leaving the company. Many business owners will need to explore options to sell their company, whether to family, friends, employees, or even their competition. Selling a business can be one of the biggest wealth transfers to happen during your lifetime, and with it comes the issue of tax.

According to Dan Kelly, President and CEO of the Canadian Federation of Independent Business (CFIB), the proposed budget changes are generating buzz in the business community, and not all of it is bad. But good, bad, or ugly, they will likely be big issues heading into next year’s election.

If you are a business owner who plans to continue owning your business for the foreseeable future, Kelly says it is a bad news story. The budget increases the capital gains inclusion rate from 50% to 66.7%, which means that any gains within your company will be subject to a higher rate of tax. And to add insult to injury, businesses are not able to take advantage of the lower rate of 50% on the first $250,000 of annual capital gains like individual taxpayers are.

The good news? If you are a business owner who is looking to sell your company. The government has proposed a significant bump in the Lifetime Capital Gains Exemption (LCGE). That means the $1 million exemption for small businesses selling shares or assets will rise to $1.25 million as of June 25, 2024. That is something Kelly and the CFIB have been pushing for a long time.

Another change that is getting mixed reviews is the new Canada Entrepreneurs’ Incentive (CEI), which will lower capital gains taxes on the next $2 million upon the sale of small business shares. For businesses that qualify, that means that there will be no tax on the first $1.25 million of shares sold, and the next $2 million will be subject to a 33% inclusion rate, which is much better than the current 50%. 

But here’s the catch: many business sectors, including restaurants, hotels, finance, insurance, real estate, and professional corporations, will not qualify for this incentive. Kelly says he is dumbfounded as to why some businesses qualify while others do not, and the CFIB is actively lobbying the government to include all entrepreneurs regardless of sector.

While business owners are having to make some big decisions before the changes take effect on June 25th, Kelly points out that they have yet to receive the new rules in writing from the federal government, let alone formal legislation. That means there is still time to make your voice heard. Stay informed. Connect with organizations like the CFIB who go to bat for Canadian businesses. And reach out to your local MP or MLA to ask them to take action.

CIBC Private Wealth consists of services provided by CIBC and certain of its subsidiaries, including CIBC Wood Gundy, a division of CIBC World Markets Inc. The CIBC logo and “CIBC Private Wealth” are trademarks of CIBC, used under license. “Wood Gundy” is a registered trademark of CIBC World Markets Inc.

David Popowich and Faisal Karmali are Investment Advisors with CIBC Wood Gundy in Calgary. 

This information, including any opinion, is based on various sources believed to be reliable, but its accuracy cannot be guaranteed and is subject to change

Clients are advised to seek advice regarding their particular circumstances from their personal tax and legal advisors.

If you are currently a CIBC Wood Gundy client, please contact your Investment Advisor.

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