The federal government has announced several changes to the Canadian Entrepreneurs’ Incentive (CEI), including plans to accelerate the incentive roll out from 10 years to five.
The CEI was first introduced in the Liberals’ Budget 2024, which also proposed increasing the inclusion rate on capital gains from one-half to two-thirds for those who earn more than $250,000 CAD.
“Half-measures, piecemeal incentives, and misguided strategies will not drive the growth Canada needs.”
The capital gains proposal drew significant ire from Canada’s tech and venture capital communities, but the budget did include two offset measures targeted toward entrepreneurs. The budget also proposed increasing the lifetime capital gains exemption from $1 million to $1.25 million CAD. The CEI would also reduce the inclusion rate to 33.3 percent on a lifetime maximum of $2 million CAD in eligible capital gains.
The government said when both are fully rolled out, the CEI and increase on the lifetime capital gains exemption would give entrepreneurs a combined exemption of at least $3.25 million when selling business shares worth up to $6.25 million.
After a series of consultations, the federal government is proposing today to accelerate the phase-in period of the CEI, scale back certain ownership and engagement criteria, remove the founder requirement, and open eligibility to more small businesses.
Budget 2024 initially proposed that the CEI would increase by $200,000 annually over ten years, to reach $2 million by 2034. The government is now proposing to double the annual phase-in increases to $400,000, to reach $2 million by 2029 instead of 2034.
The rollout period for the CEI was a key source of contention for some players in Canada’s innovation space. The industry lobby group Council of Canadian Innovators (CCI) proposed accelerating the phase-in from 10 years to just three years in an open letter penned earlier this year.
Budget 2024 noted that the CEI would be available to business owners who must be a founder and “at all times since founding the company, held 10 percent or more of all common shares.“
The government is now proposing to claw that ownership requirement back to five percent, and reduce the minimum ownership time to any continuous 24-month period, at any time since the business’ founding.
The government is also proposing reducing the level of engagement in the business required from business owners from five years immediately preceding the sale to “any combined three-year period at any time since the founding of the business.”
“The government heard that many entrepreneurs may reduce their day-to-day involvement in a company prior to selling and that many business owners choose to sell before five years have elapsed,” the government said in a statement.
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Finally, the government said it plans to expand the eligibility of the CEI to “more small businesses.” The government noted that qualified farming and fishing property would also be eligible, as well as “additional small businesses,” but did not clarify further.
The changes proposed today have not been well received by some members of Canada’s tech ecosystem. In a statement sent to BetaKit, CCI president Benjamin Bergen said these proposals “fall short of addressing the harm caused by the government’s tax plans on Canada’s innovation economy,” adding that the CEI “does not adequately mitigate the harm” of the wider capital gains changes.
“Half-measures, piecemeal incentives, and misguided strategies will not drive the growth Canada needs. Canadians deserve bold, forward-thinking economic policies that actually foster growth and give companies the talent and capital they need to scale,” Bergen said. “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.”
Bergen reiterated CCI’s prior calls for the government to reverse its planned changes to capital gains tax. The government is inviting feedback to these changes until Sept. 11.
Communitech president and CEO Chris Albinson told BetaKit the Kitchener-Waterloo hub worked with a group that included the Canadian Venture Capital and Private Equity Association, Canada’s Tech Network, Invest Ottawa, MaRS, TD, and EY to provide the government with feedback and projections on the CEI. Communitech has advocated for harmonizing the CEI with the US Qualified Small Business Stock.
Communitech president and CEO Chris Albinson said he was pleased to see the eligibility widened from “tiny slice of founders” to “the majority of founding teams.”
Albinson noted that the median exit of a Canadian company is $39 million, with a median ownership of 15 percent among founders at exit, where the typical number of founders is 2.3. Under the previous requirements, the vast majority of Canadian founders did not own 10 percent of their companies at the time of exit and would therefore be ineligible for the CEI.
“These changes for founding teams are meaningful and a step in the right direction,” Albinson said regarding the government’s proposals today.
However, he pointed out that the proposed changes still fall short. He specifically mentioned that the changes do not address eligibility for employees, angels, or early-stage investors. He said 98 percent of these groups do not own five percent or more of a company, making them ineligible for the CEI under the current proposal.
“As currently proposed, these enhancements do not go far enough to incent Canadian entrepreneurship,” Albinson added.
This story was updated to include additional commentary from Communitech’s Chris Albinson.
Feature image courtesy Justin Trudeau’s Flickr.