Feds expand eligibility, drop founder requirement for Canadian Entrepreneurs’ Incentive

The CEI reduces the inclusion rate to one-third on a lifetime maximum of $2 million in eligible capital gains when an entrepreneur sells their business.

Combined with the budget’s increased lifetime capital gains exemption of $1.25 million, up from $1,016,836 in 2024, entrepreneurs will have a combined exemption of at least $3.25 million once the incentive is fully rolled out. As a result, eligible business owners selling business shares worth up to $6.25 million will be better off, the budget said. (Editorial update: See this Finance release for tax savings on capital gains up to $6.25 million. See tables below for example of $6.25 million in capital gains with and without the CEI.)

Draft legislation released on Monday accelerates the incentive’s rollout by doubling the annual phase-in increases — to $400,000 — to reach $2 million by 2029, instead of 2034 as originally proposed.

Breakdown of a $6.25-million capital gain in 2029

	Applicable capital gain inclusion rate	Tax on gain assuming a 50% tax rate (and with CEI fully implemented)
First $1,250,000	N/A due to increased LCGE	N/A
Next $2,000,000	33.33%	$333,300
Next $250,000	50%	$62,500
Last $2,750,000	66.67%	$916,712.50
	Total	$1,312,512.50

Breakdown of $6.25-million gain without CEI

	Applicable capital gain inclusion rate	Tax on gain assuming a 50% tax rate (and with no CEI)
First $1,250,000	N/A due to increased LCGE	N/A
Next $250,000	50%	$62,500
Last $4,750,000	66.67%	$1,583,412.50
	Total	$1,645,912.50

LCGE = lifetime capital gains exemption

In the draft legislation, professional corporations remain ineligible for the incentive, as do businesses in the financial services, insurance, real estate, food and accommodation, arts, recreation and entertainment sectors, as well as businesses that provide consulting services.

However, qualified farming and fishing property and “additional small businesses” are now eligible, Finance said in a release. Farmers and fishers had to sell shares in the original proposal.

The Canadian Federation of Independent Business (CFIB) has confirmed with the government that eligibility would extend to personal services businesses, a broad category that includes hair and nail salons, a spokesperson for the CFIB said in an email.

The feds also dropped the requirement that business owners must be founders, and lowered the proposed ownership requirement to 5% from 10%.

The draft legislation reduces minimum ownership time to any continuous 24-month period, “thereby eliminating the requirement to be a founder,” Finance said in its release. The founder and ownership changes were made in response to feedback suggesting the ownership requirement didn’t meet the needs of entrepreneurs in the tech and farming sectors, the release said.

The feds also reduced how long an owner must work in the business, which, as originally proposed, was five years preceding the sale.

Now, the business owner must be actively engaged in the business for a “combined three-year period at any time since the founding of the business.” The change accommodates business owners who reduce their involvement in the business ahead of a sale.

In a release on Tuesday, the CFIB said it was pleased with the changes, even though they don’t fully offset the negative impact of the increased capital gains inclusion rate. Further, the incentive should be expanded to all entrepreneurs, the CFIB said.

Many types of businesses are left out of the CEI “for no apparent reason,” said Jamie Golombek, managing director, tax and estate planning with CIBC Private Wealth in Toronto, in an email. “This will leave all kinds of business without the ability to take advantage of this tax break upon a sale.”

The CFIB said the changes won’t benefit “the many business owners who sell their assets rather than shares (other than farms/fishers) or those who have capital gains within their corporations. For them, the increase in the inclusion rate will hit hard.”

The Council of Canadian Innovators (CCI), chaired by former Blackberry co-CEO Jim Balsillie, said in a release Monday that the changes “fall short of addressing the harm” to the innovation economy caused by the tax changes.

The incentive will apply to dispositions that occur after 2024, and stakeholders can comment on the draft legislation until Sept. 11.

The CFIB and the CCI both said they’ll continue to push the government to reverse the hike in the capital gains inclusion rate.