Canada’s Department of Finance has put forward a proposal to enhance the Canadian Entrepreneurs’ Incentive as part of recently released draft legislative measures on 12 August, 2024.

The Department is seeking public comments on these changes until 11 September, 2024.

Earlier, the Department of Finance, in a release, announced a public consultation on a legislation that includes new tax measures for Budget 2024 on 12 August, 2024.

This follows the enactment of several budget measures in June 2024 under the Fall Economic Statement Implementation Act, 2023 (Bill C-59) and the Budget Implementation Act, 2024, No. 1 (Bill C-69).  The measures include the Global Minimum Tax Act, which introduced the Income Inclusion Rule (IIR) and the Qualified Domestic Minimum Top-up Tax (QDMTT), effective for fiscal years starting on or after 31 December, 2023.

The proposal has provisions to encourage Canadian innovators to turn their ideas into growing businesses that create good jobs.

The government announced the creation of the Canadian Entrepreneurs’ Incentive in this year’s budget.

When it comes time to sell a business, this incentive would reduce the inclusion rate to one-third on a lifetime maximum of CAD 2 million in eligible capital gains.

Combined with the increased CAD 1.25 million Lifetime Capital Gains Exemption announced in Budget 2024, the Canadian Entrepreneurs’ Incentive, when fully rolled out, would make eligible business owners better off when selling business shares worth up to CAD 6.25 million.

The Department also proposes to:

  • Eliminating the Founder Requirement and Reducing Ownership Requirements: Budget 2024 announced a requirement that business owners must be a founder who, at all times since founding the company, held 10% or more of all common shares. Following feedback that this ownership requirement may not meet the needs of entrepreneurs, particularly in the tech and farming sectors, the government is now proposing to:
    • Reduce minimum ownership levels to 5%; 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: Budget 2024 announced that business owners must be actively engaged on a regular, continuous, and substantial basis for the five years immediately preceding the sale to benefit from the incentive. The government 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. Recognising the importance of innovation, the government is now proposing to reduce the period of active engagement on a regular, continuous, and substantial basis to any combined three-year period at any time since the founding of the business.
  • Expanding Eligibility to More Small Businesses: Budget 2024 announced that small business corporation shares would be eligible property for the incentive, making eligible entrepreneurs better off when selling business shares worth up to CAD 6.25 million. To expand the incentive to more small business owners, including the next generation of business owners, the government is now proposing to expand eligibility to:
    • All qualified farming and fishing property; and,
    • Additional small businesses.
  • Accelerating the Rollout: Budget 2024 announced the incentive would increase by CAD 200,000 annually over ten years, to reach CAD 2 million by 2034. In response to entrepreneurs’ desire for the full incentive to be delivered sooner, the government is now proposing to double the annual phase-in increases to CAD 400,000, to reach CAD 2 million by 2029.