What is the Proposed Canadian Entrepreneur's Incentive (“CEI”)?

  • October 11, 2024
  • Kevin Yip, partner at Fasken; Katerina Ignatova, tax associate at Fasken; and Dongwoo Kim, articling student at Fasken

Introduction

The Department of Finance Canada (“Finance”) announced the new CEI in its 2024 Federal Budget (the “2024 Budget”). The CEI gives certain owners of eligible businesses access to a reduced capital gains inclusion rate when they sell shares of their business. On August 12, 2024, Finance announced additional changes and released draft legislation in respect of the CEI.  If enacted, the CEI will be added as new section 110.63 of the Income Tax Act (Canada) (the “Act”) and will be available as of January 1, 2025.

Given that the 2024 Budget proposed a general increase of the capital gains inclusion rate from 50% to 67%, the new CEI is, presumably, meant to reduce the impact of this increase on the sale of shares of certain businesses in Canada.

This article provides a short overview of the proposed CEI and the changes announced in August 2024.

Key takeaways

  • The CEI will reduce the “inclusion rate” from the proposed two-thirds to one-third on a lifetime maximum of $2 million in eligible capital gains.
  • In August 2024, Finance announced certain changes to the CEI, including the elimination of the “founder” requirement, the reduction of the minimum ownership and engagement periods, and the acceleration of the rollout period.
  • The CEI’s reduced inclusion rate is applied to gains that exceed the individual’s lifetime capital gains exemption (“LCGE”).
  • Individuals are still eligible to claim their reduced capital gains inclusion rate of 50% on the next $250,000 of capital gains, making it possible to claim the CEI, the LCGE, and the new $250,000 exemption on the same share sale.