The Canadian Entrepreneur Incentive, introduced in the 2024 budget, offers tax breaks on capital gains to support entrepreneurs, including farmers.
Producers should consider this new incentive when evaluating their succession planning with their trusted advisers.
The CEI can be used as way to further reduce taxable income on the sale of qualifying farm property above the lifetime capital gains exemption.
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It should be noted that this article was written prior to the government prorogation announcement on Jan. 6. The events that unfold when Parliament resumes could have a significant impact on the concepts discussed in this article.
In Canada, entrepreneurs, and farmers, often struggle to get the money they need to grow their businesses. To help with this struggle, the government has created the New Canadian Entrepreneurs’ Incentive. This program helps reduce financial challenges and encourages entrepreneurs to reinvest in new projects, especially in technology and manufacturing.
The CEI lowers the capital gains inclusion rate to 33.3 per cent on up to $2 million of eligible capital gains in a lifetime. It was proposed to begin Jan. 1, 2025.
The main feature of the program lowers the capital gains inclusion rate from 50 percent or 66.6 per cent, giving entrepreneurs and farmers immediate tax savings.
The maximum eligible capital gains will increase by $400,000 each year until it reaches $2 million in 2029. Combined with the $1.25 million lifetime capital gains exemption (also proposed in last year’s budget), entrepreneurs and farmers can claim a total of at least $3.25 million in exemptions. This gives them more financial flexibility to reinvest in their businesses.
There are some qualifiers under the proposed CEI, including qualifying property. Qualified property would be considered to be a Qualified Small Business Corporation (QSBC) share or a Qualified Farm or Fishing Property (QFFP).
QFFP includes real or immovable property, a share of capital stock of a family farm or fishing corporation and an interest in a family farm or fishing partnership.
There are also a number of tests to determine the eligibility for the CEI:
The property of the eligible business is for at least 24 continuous months preceding the disposition time a share, and the individual owned not less than five percent of the full voting rights under all circumstances.
If the property is an interest in a partnership, the individual’s specified proportion of the partnership in its most recent fiscal period is not less than five percent, and if the property is not a share or partnership interest, the fair market value (FMV) of the individual’s interest in the property was not less than five percent of the total FMV of the property.
The individual must also be actively engaged on a regular and continuous and substantial basis for a total period of not less than three years.
Once you determine that you qualify for the CEI, it is easy to see the potential tax savings.
For example, let’s say you have QFFP shares, and you meet all the criteria to utilize the CEI and you decide to sell your QFFP shares for $2 million. You would have been taxed on $1 million (50 per cent inclusion) under the old system. With the new incentive, only $667,000 is taxed (33.3 per cent inclusion), reducing your gain by about $333,000.
The Canadian Entrepreneurs’ Incentive is an important step in supporting farmers in Canada. Helping farmers achieve their goals will keep Canada strong and competitive in the global economy. The CEI should be considered in succession planning and discussed with a trusted tax adviser.
Colin Miller is a chartered accountant and partner with KPMG’s tax practice in Lethbridge. Contact: colinmiller@kpmg.ca. He would like to thank Karrie Geremia and Keith Simms of KPMG for their assistance with writing this article.
