this proposed tax reduction when the capital gains exemption is exhausted

Budget 2024 proposed to reduce the capital gains inclusion rate on capital gains realized on the disposition of qualifying shares by an eligible individual. The inclusion rate would be halved, resulting in 1/3 of such gains being taxable under the proposed 2/3 inclusion rate. This reduced inclusion rate would apply to gains not offset by the capital gains exemption. No draft legislation was included in the budget.

On August 12, 2024, the Department of Finance issued a News Release (Government announces details on new Canadian Entrepreneurs’ Incentive) summarizing changes to the Budget 2024 announcements to broaden access to the CEI. The Department of Finance also issued several packages of draft legislation for consultation on August 12, 2024. The draft legislation and explanatory notes related to Budget 2024 and other proposals included the provisions that would govern the CEI.

There would be a lifetime limit on gains eligible for this reduced rate, set at $400,000 commencing in 2025 and increasing by $400,000 annually until reaching a total of $2 million in 2029. The Budget had proposed phasing the $2 million limit in over ten years, rather than over five years as now proposed.

To be eligible for this reduced inclusion rate, numerous conditions would be required to be met. The August 12, 2024 News Release announced the removal of the requirement that the taxpayer be a founding shareholder, a reduction in several other requirements and an expanded list of businesses that would be eligible.

available only for sales by individuals

Individuals (other than trusts) would be eligible to claim the CEI where they dispose of qualifying Canadian entrepreneur incentive property in the tax year. Sales by other taxpayers would not be eligible.

some businesses eligible for CGE will not qualify for the CEI

Qualifying Canadian entrepreneur incentive property (QCEIP)
At the time of disposition, QCEIP must be either qualified farm or fishing property (QFFP; as defined in Subsection 110.6(1)) or shares that would be qualified small business corporation shares (QSBC shares; as defined in Subsection 110.6(1)) under a modified definition from the requirements applicable for capital gains exemption (CGE) purposes. To be QCEIP, the relevant assets of the QSBC must be used principally in an active business that is not an excluded business and is carried on primarily in Canada by the corporation or by a related corporation. Budget 2024 did not indicate that QFFP would be eligible for the CEI.

minimum 5% ownership interest for at least two years

Ownership requirements
To be QCEIP, for at least 24 continuous months, the individual must have owned no less than 5% (reduced from 10% in Budget 2024) of one of the following interests (depending on the legal form of the business interest):

1. for a corporation, shares, including both value and full voting rights;
2. for a partnership, the right to income or losses (meeting the definition of the partner’s specified proportion in Subsection 248(1)); or
3. for other property, the fair market value of the property.

This test could be met for any 24-month period during the individual’s ownership of the property. It need not be met throughout the individual’s ownership nor at the time of disposition. Only QFFP could be an asset other than shares of a corporation.

must work in the business for at least three years

Actively engaged
QCEIP must be an interest in a business in which the owner was actively engaged on a regular, continuous and substantial basis for at least three years. The determination of whether the owner was actively engaged would use the 20-hour per week test applicable to the tax on split income (TOSI, Paragraph 120.4(1.1)(a)). This test could be met for any total period of at least three years and need not be met at the time of disposition. Further, it appears that some or all of the period of active engagement could occur at a time before the taxpayer owned the QCEIP.

Excluded business
An excluded business would not be eligible for the CEI and would mean each of the following:

1. the professional practice of an accountant, lawyer, notary, physician, mental health practitioner, health care practitioner, veterinarian, optometrist, dentist, chiropractor, engineer or architect;

few knowledge-based businesses would qualify

2. a business whose principal asset is the reputation, knowledge or skill of one or more employees;
3. the provision of consulting services;

many financial services would not be eligible

4. the provision of financial services including financial transactions involving the creation, liquidation, or change in ownership of financial assets, in facilitating financial transactions or credit intermediation;
5. ​the provision of services or instruments relating to insurance including underwriting annuities, insurance policies and reinsurance, retailing of insurance and the provision of related services to policy holders;
6. ​the provision of services relating to property including:
   
   

real estate and other property rental operations would not qualify

1. 1. appraising real property,
   2. renting, leasing or otherwise allowing the use of tangible or intangible property, or
   3. managing, selling or renting real property for others;

7. the purchase, sale and rental of real property;

many hospitality-related businesses would not be eligible

8. the provision of services or sale of goods relating to providing short-term lodging and complementary services to travellers, vacationers and others, in facilities such as hotels, motor hotels, resorts, motels, casino hotels, bed and breakfast accommodations, cottages and cabins, recreational vehicle parks and campgrounds, hunting and fishing camps, and recreational and adventure camps;
9. the provision of services or sale of goods relating to preparing meals, snacks and beverages, for immediate consumption on or off the premises; and
10. operating facilities or providing services relating to cultural, entertainment and recreational interests including:

1. 1. production, promotion or participation in live performances, events or exhibits intended for public viewing,
   2. providing the artistic, creative or technical skills necessary for the production of artistic products or live performances,
   3. preservation or exhibition of objects or sites of historical, cultural or educational interest, and
   4. operation of a facility or provision of services that enable patrons to participate in sports or recreational activities or pursue amusement, hobbies and leisure-time interests.

While assets used in an active business that is also an excluded business could permit a corporation to be a QSBC, they would not contribute to meeting either the 50% holding period test or the all or substantially all at the time of disposition test in determining QCEIP status.

Other provisions
Various deeming rules and restrictions similar to those applicable to the CGE would also apply to the CEI.