In an effort to support and encourage Canadian entrepreneurs such as pharmacy owners, the federal government has announced a Canadian Entrepreneur Incentive (CEI) as part of Budget 2024 to provide financial support and resources to help aspiring entrepreneurs start and grow their businesses beginning January 1, 2025.
It is important to note that details have not yet been fully finalized, the Government has made several changes and likely will make more as Canadians provide their input.
This new incentive reduces the capital gains inclusion rate for entrepreneurs in a limited number of industries which we’ll outline below.
This will enable entrepreneurs to “recycle more capital towards their next goal, whether it be a new company, an investment in a promising start-up, or a comfortable retirement” as stated on the Government of Canada website.
How It Works
If you want to maximize your lifetime capital gains exemption (LCGE) but want to sell your business for more than the LCGE or you don’t qualify for it, this new federal government incentive is a great tool which reduces the taxable capital gain at the time of sale by 50%.
It will launch in phases beginning January 2025 allowing for $400,000 per year for the next 10 years, up to a maximum of $2 million in 2029 of capital gains that will be reduced by 33.3%, a 50% decrease compared to the normal capital gains tax.
The additional $2 million incentive is for founding investors in certain sectors who own at least 10% of shares in their business, and where the company has been their principal employment for at least five years.
Ultimately, when the Canadian Entrepreneurs’ Incentive is fully implemented, and combined with the increased $1.25 million Lifetime Capital Gains Exemption announced in Budget 2024, the Canadian Entrepreneurs’ Incentive, when fully rolled out, would make eligible business owners better off when selling business shares worth up to $6.25 million.
New Enhancements to The Incentive
New enhancements were made to ensure innovators and small business owners, including pharmacists, farmers, etc., are rewarded for their hard work. It was originally announced in Budget 2024 that business owners must be a founder who, at all times since founding the company, held 10% or more of all common shares. This has now been reduced. New rules involve reducing minimum ownership levels to 5%, and reducing minimum ownership time to any continuous 24-month period at any time since the business’s founding, thereby eliminating the requirement to be a founder.
Budget 2024 also originally announced that business owners must be actively engaged on a regular, continuous, and substantial basis for the five years immediately preceding the sale to benefit from the incentive. It is now being proposed to reduce the period of active engagement on a regular, continuous, and substantial basis to any combined three-year period at any time since the founding of the business.
Another change was made regarding small business corporation shares. To expand the incentive to more small business owners, including the next generation of business owners, the government is now proposing to expand eligibility to qualified farming and fishing properties and additional small businesses, including pharmacies.
The Budget 2024 originally announced that the incentive would increase by $200,000 every year for the next ten years each year to reach $2 million by 2034, however, that has now been doubled with annual increases of $400,000 to reach $2 million by 2029.
Eligible Small Businesses
There are a limited number of businesses that are eligible for this new incentive, so it’s best to consult with a lawyer or accountant to determine if you are eligible as a pharmacy owner and if you meet the criteria. The incentive may be eligible for those in the following industries:
- Pharmacy (not through a professional corporation)
- Construction
- Manufacturing
- Tech
- And more
Industries NOT eligible include:
- Arts & Entertainment
- Financial, Insurance or Consulting
- Food & Accommodations
- Personal Care
- Professional Corporations
- Real Estate
- And more
Entrepreneurs Can Benefit From This Large Tax Break
The New Canadian Entrepreneur Incentive offers a tax break and other benefits to entrepreneurs who meet certain criteria. If this is you, you can benefit from this incentive in many ways.
You can set yourself up for long-term success in the Canadian business landscape when you contact the experts at Pharma Tax to determine eligibility and how you can best reap the rewards as navigating incentives can be confusing and complicated.
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