Canadian Entrepreneurs’ Incentive: Potential Tax Savings in the Hundreds of Thousands

Active Canadian founders and entrepreneurs may be getting a powerful new tax deduction to utilize if the changes announced in the 2024 Federal Budget (the “Budget”) are passed into law. The Budget proposes to introduce the Canadian Entrepreneurs’ Incentive (the “CEI”), a deduction that will be available to Canadian business owners who meet certain criteria.

The draft amendments to the Income Tax Act currently propose to phase in the CEI starting with a limit of $400,000 in 2025, and eventually reaching $2,000,000 in 2029. However, the legislation is still in the public commentary phase and subject to change.

The CEI will apply to reduce the capital gains inclusion rate from 2/3 to 1/3 for individuals disposing of shares, provided that the share is not that of an “excluded business”. Generally, most Canadian tech startups will not fall into the category of an “excluded business”, and individuals will qualify if (subject to other criteria), the shares are that of a “qualified small business corporation”, the individual owned at least 5% of the issued and outstanding shares of the corporation for a period of 24 months, and the individual was actively and substantially involved in the business for 3 years. Alongside this, the Budget and draft legislation naturally presents a heap of anti-avoidance provisions.

Overall, this is excellent news for founders of Canadian start-ups that want to grow their business and eventually be presented with an exit opportunity. To learn more about the potential applications of the CEI and to explore potential opportunities for utilization of this deduction, contact a member of LaBarge Weinstein’s Tax, Tax Planning, & Tax Dispute Resolution team.

If you have any questions feel free to contact us at info@lwlaw.com.