DAN KELLY
OTTAWA – Nearly three-quarters (72%) of small business owners say the proposed changes to capital gains taxation will harm Canada’s climate for investment and growth, according to new data from the Canadian Federation of Independent Business (CFIB). While small businesses support some of the budget measures, the majority (63%) oppose the changes without critical amendments.
“The proposals in the federal budget have huge potential consequences, and many small business owners are feeling forced to make important decisions with little time and very few details,” said Dan Kelly, CFIB president. “It is outrageous that the federal government has not yet shared draft legislation to allow small business owners and their advisors to understand the full implications of the capital gains changes.”
Capital Gains on Business Sales
The budget proposed two positive changes that have the potential to benefit many owners when they sell the shares of their business – an increase in the Lifetime Capital Gains Exemption (LCGE) to $1.25 million and a new Canadian Entrepreneurs’ Incentive (CEI) that will ultimately lower the inclusion rate to 33.3% on the next $2 million for some owners. In addition, an owner selling their shares of their business could have an additional $250,000 at the current inclusion rate of 50%.
“A strong majority (63%) of small business owners said the increase in the LCGE will be helpful to them,” Kelly added. “And while 78% of small business owners support the concept of the new CEI, only 45% felt they will directly benefit from it in its current form.” CFIB members are calling on the federal government to expand access to the CEI for all small business owners, as well as farmers and fishers selling properties and assets.
Overall, CFIB data on the estimated sale prices of small businesses suggests there will be winners and losers from the proposed package of changes:
| Expected Capital Gain Upon Sale of Shares of Business | Share of SMEs | Increase or Decrease in Taxable Capital Gains by 2034 |
| $0-1M | 39% | No change |
| $1-2M | 20% | Up to 50% decrease |
| $2-6M CEI Eligible | 13% | Up to 42% decrease |
| $2-6M Not CEI Eligible | 13% | Up to 25% increase |
| $6M+ | 15% | Up to 33% increase |
Capital Gains on Business Investments
Changes to capital gains tax rules have significant negative consequences for small business owners holding investments within their corporations. CFIB data shows nearly half (48%) of small firms own property or land in their corporation and a third (33%) own stocks or other investments. The inclusion rate on all of these investments will rise to 66.7% as of this summer, raising taxes on small businesses.
“The hike in the inclusion rate on small business investments will be deeply harmful,” Kelly said. While many business owners hold outside investments in their corporations to help with their retirement planning (75%), over half (53%) use these investments to help save for economic downturns, like the one Canada has experienced over the past several years. “With rapidly rising business bankruptcies across Canada, now is not the time to raise taxes on the rainy-day funds of small businesses owners,” Kelly added.
Need for Major Changes
“After all the stress and effort entrepreneurs go through to open a business and create jobs, will they want to continue to grow their business in Canada given the proposed capital gains changes?” said Corinne Pohlmann, Executive Vice-President of Advocacy at CFIB.
For this package to work, major changes are required. CFIB will be pushing all parties to:
- Protect the increase in the Lifetime Capital Gains Exemption to $1.25 million
- Expand the new Canadian Entrepreneurs’ Incentive to include all entrepreneurs:
- Include all sectors, including farmers and fishers selling assets
- Include non-founders to encourage people to invest in small firms
- Cut the 10-year implementation schedule in half
- Scrap the planned increase in the general inclusion rate to 66.7%. If government is unwilling to abandon this plan, it should:
- Grandfather all existing capital gains using a V-Day (valuation day) as was done in 1971
- Allow corporations to benefit from $250,000 each year at 50% inclusion like individuals
- Allow for 5-year income averaging to benefit from the $250,000 annual threshold for larger capital gains for irregular events, like selling a property
For more information on capital gains changes and how they may affect SMEs, visit https://www.cfib-fcei.ca/site/capital-gains.
Dan Kelly is president of the CFIB
