Ottawa’s capital gains changes make winners and losers, says CFIB

Small business lobby sees progress on $2.5 billion in carbon tax rebates

The 2024 federal budget changes on capital gains will create many winners, but also losers among Canada’s entrepreneurs, according to the Canadian Federation of Independent Business (CFIB), which issued a detailed analysis of the budget following its release last month.

Carbon tax rebates

Dan Kelly, CEO of the Canadian Federation of Independent Business.

However, the CFIB is optimistic on another issue that’s impacting small businesses, noting important budget progress in unlocking $2.5 billion in carbon tax rebates for SMEs.

In a recent survey of the the needs of small businesses leading up to budget day April 16, the CFIB found that over three-quarters (77 per cent) of the country’s small business owners felt that addressing rising prices and the cost of doing business should be a top priority for government this year, while another 74 per cent wanted to see government reduce the overall tax burden.

CFIB made several recommendations to the federal government, urging it to focus on reducing the cost of doing business by:

  • Returning the $2.5 billion in carbon tax revenues owed to all small businesses, not just certain sectors;
  • Lowering the federal small business tax rate from 9 per cent to 8 per cent, at least for the next two years;
  • Increasing the small business deduction threshold (e.g., to $700,000) and indexing it to inflation going forward;
  • Lowering Employment Insurance (EI) premiums for smaller employers;
  • Introducing a timeline to balance the budget;
  • Reducing red tape.

Capital gains advantages

After the release of the Trudeau government’s 2024 budget, CFIB president Dan Kelly had the following to say. “The big surprise for small business is a series of changes to capital gains taxation,” said Kelly.

“Our early assessment is that most small business owners will come out ahead or be unaffected by today’s changes as a result of a boost in the Lifetime Capital Gains Exemption from $1 million to $1.25 million and a new Canadian Entrepreneurs’ Incentive for some sectors which will lower the capital gains inclusion rate to 33.3 per cent on the next $2 million when fully phased in.”

However, the capital gains inclusion rate increase to 66.7 per cent will create many net losers, he added, including owners of medium-sized businesses.

In addition, owners of professional corporations (such as doctors), financial, insurance, food and accommodation, arts, recreation, entertainment and personal care services firms will be excluded from accessing the new Canadian Entrepreneurs’ Incentive and will be hit with more taxes on capital gains for sales of small business shares above $2.25 million.

‘Demotivating’ changes

“What worries me the most about the capital gains changes is the potential to demotivate Canadians from getting into business in the first place or working hard to grow a small business to a medium-sized business,” continued Kelly.

“CFIB will be pushing back against any increase in the capital gains inclusion rate for all small- and medium-sized business owners. It seems bizarre that government would single out some sectors of Canada’s SME community for higher taxes, including many of those hardest hit by pandemic restrictions like restaurants and arts and recreation firms.

Long overdue rebates

“Carbon tax rebates owed to small businesses have been a long time coming, but we’re glad to see the government making progress on it,” added Kelly. “Most importantly, it is good to see government broaden its eligibility rules to include most small and medium-sized firms.”

The Trudeau government has said it will urgently return over $2.5 billion owed to an estimated 600,000 businesses with fewer than 500 employees.

The Trudeau government has said it will urgently return over $2.5 billion owed to an estimated 600,000 businesses with fewer than 500 employees. Responding, CFIB says it “understands all Canadian Controlled Private Corporations (CCPCs) that issue T4s in the eight provinces will receive a rebate cheque based on their number of employees.”

“Many details of the size, scope and timing of carbon tax rebates for SMEs remains unclear,” commented Kelly, maintaining that CFIB will continue to call on government to ensure the $2.5 billion is returned in 2024 with meaningful rebates for the smallest businesses and to raise the share of future SME rebates back to 9 per cent of carbon tax revenue or more.

Budget not yet balanced

“It is important to note that 82 per cent of small firms now want the consumer carbon tax regime scrapped altogether,” he said. In the meantime, the CFIB says the federal government hasn’t introduced a plan to bring the budget back to balance, while it continues to project huge deficits for the foreseeable future.

Commenting on other budget measures:

  • CFIB said it is encouraged to see Accelerated Capital Cost Allowance to allow businesses to immediately write off the full cost of innovation and productivity enhancing assets, such as computers and data infrastructure, starting today to January 1, 2027.

The lobby group also said the 2024 budget made important progress on Employee Ownerships Trusts, allowing business owners to access a special capital gains exemption of up to $10 million when selling a business to employees.