The capital gains inclusion rate hike announced as part of Budget 2024 continues to stir derision and debate across Canada’s tech sector. The latest twist in the saga came this week when the Department of Finance announced changes to the Canadian Entrepreneurs Incentive (CEI) in a bid to appease critics and ensure “innovators and small business owners {…} are rewarded for their hard work.”
The CEI was announced alongside the capital gains modifications in a bid to “encourage Canadian innovators to turn their ideas into growing businesses that create good jobs,” the government’s statement reads. This is done through the reduction of the capital gains inclusion rate to one-third on a lifetime maximum of $2 million dollars when founders sell their businesses.
The CEI was paired in the Budget alongside an increased $1.25 million Lifetime Capital Gains Exemption that’s designed to “make eligible business owners better off when selling business shares worth up to $6.25 million.”
Much of the ire from the business community was that this ceiling is simply too low—especially when unpacking the impact on investors and talent that are critical to driving the Canadian tech ecosystem. In a survey from the Council of Canadian Innovators (CCI) conducted in July, 90 percent of Canadian business leaders polled were concerned that the new rules would “harm the economy” and limit access to critical growth capital.
New requirements for the Canadian Entrepreneurs Incentive
On August 12, the government announced that following consultations held in response to Budget 2024, they’d be adding “enhancements” to the CEI, including:
- No more Founder Requirement, reduced Ownership Requirement: Originally, Budget 2024 required that to qualify as a Founder under the CEI, an individual must have held at least 10 percent of common shares through the lifetime of the company. Now, ownership levels will be reduced to 5 percent, while the ownership time is limited to “any continuous 24-month period” since the business was created.
- Lower Engagement Requirement: Previously, to enjoy the benefits of the CEI, business owners would need to prove full-time, day-to-day involvement in the business for the five years prior to selling. As many founders can attest, this just doesn’t align with the realities of how many fast-growth companies operate. Instead, the “period of active engagement” for owners can take place during any combined three-year period since the business was created to meet the new Engagement Requirement.
- Wider eligibility: Put simply, the language of the rule has been expanded to encompass a wider array of small business owners—namely, farming and fishing professionals.
- Faster rollout: Originally, the CEI was set to increase by $200,000 annulary to reach $2 million by 2034. That timeline has been halved, and the phase in amount doubled, increasing to $400,000 with the goal of reaching $2 million by 2029.
The government has invited commentary from the public on the latest announcement via email to to [email protected] by September 11, 2024.
Despite the picture the government paints on the benefits of the measure, many stakeholders believe it’s too little to fend off the bulk of the damage the new rate hikes will incur—to say nothing of the focus on farming versus tech, the sector where the bulk of the criticism on the measures has been coming from.
“Piecemeal incentives” don’t impress Canadian business leaders
In a statement released this week, CCI President Benjamin Bergen expressed continued frustration on behalf of the larger Canadian tech and business community.
“Half-measures, piecemeal incentives, and misguided strategies will not drive the growth Canada needs,” Bergen’s statement begins. “Canadians deserve bold, forward-thinking economic policies that actually foster growth and give companies the talent and capital they need to scale. It’s time for the government to stop taxing ambition and start working with innovators to tackle Canada’s productivity and prosperity challenges. The current path is not just misguided—it’s a dead end.”
Another case that Bergen and the CCI make in contesting both Budget 2024 and the latest amendments is the fact that the government’s own projections don’t anticipate a “cash windfall” from the revenue gained through higher capital gains tax rates.
Still, with the government continuing to receive and review consultations on their latest policies, there is hope that further modifications may be executed that could stave off the most dire forecasts for the implications of the new rules.
The government has also referenced their banner Scientific Research & Experimental Development (SR&ED) program as an existing, powerful resource for helping innovative businesses grow and thrive in Canada. With the ability for businesses to recoup upwards of 60 cents on the dollar for all qualifying research and development activities as part of SR&ED, it’s an impactful program that has helped businesses of all sizes stretch their product development runways further and drive greater innovation.
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Canadian Entrepreneurs Incentive (CEI) FAQ
- What changes were announced to the Canadian Entrepreneurs Incentive (CEI)? The Department of Finance announced modifications to the CEI, including reducing the ownership requirement from 10% to 5%, lowering the engagement requirement from five to three years, expanding eligibility to include farming and fishing professionals, and accelerating the rollout of the full $2 million incentive to 2029 instead of 2034.
- Why were these changes made to the CEI? The changes were made in response to criticism and debate surrounding the capital gains inclusion rate hike announced in Budget 2024. The government aims to appease critics and ensure that “innovators and small business owners are rewarded for their hard work.”
- How has the business community responded to these changes? Many stakeholders, including the Council of Canadian Innovators (CCI), believe the changes are insufficient to offset the potential damage from the new capital gains rate hikes. CCI President Benjamin Bergen called the changes “half-measures” and “piecemeal incentives” that won’t drive the growth Canada needs.
- What other concerns have been raised about the capital gains changes? A survey by the CCI found that 90% of Canadian business leaders were concerned that the new rules would harm the economy and limit access to critical growth capital. Additionally, government projections don’t anticipate a significant “cash windfall” from the increased capital gains tax rates.
- What alternative program has the government highlighted for innovative businesses? The government has referenced the Scientific Research & Experimental Development (SR&ED) program as an existing resource for helping innovative businesses grow in Canada. This program allows businesses to recoup up to 60 cents on the dollar for qualifying research and development activities.
