2024 Federal Budget – Personal tax measures

Canadian entrepreneurs incentive

This Budget proposes to provide a further tax incentive to entrepreneurs who sell their businesses in addition to the long-standing LCGE on the sale of qualifying shares.

The Canadian entrepreneurs incentive  proposes to additionally provide for a favourable capital gains tax rate. This incentive would allow capital gains to have an inclusion rate that is one half the prevailing inclusion rate, on up to $2 million in capital gains per individual over their lifetime. The lifetime limit would be phased in by increments of $200,000 per year, beginning on January 1, 2025, reaching a total of $2 million by January 1, 2034.

A corporation’s share must be a qualifying share in order to qualify for the CEI . The conditions for a qualifying share are different from those required to qualify for the LCGE, but certain shares could qualify for both conditions and therefore the owner would be entitled to both incentives.

While the LCGE has similar measures for qualifying small business shares and qualifying farming or fishing property, the CEI applies only to incorporated businesses.

Qualifying conditions 

Qualifying conditions for the CEI are as follows:

• At the time of sale, the share was a share of the capital stock of a small business corporation (for the purposes of the Income Tax Act) owned directly by the claimant 
• Throughout the 24-month period immediately before the disposition of the share, it was a share of a Canadian-Controlled Private Corporation (CCPC) and more than 50% of the fair market value of the assets of the corporation were: 
  • Used principally in an active business carried on primarily in Canada by the Canadian-Controlled Private Corporation, or by a related corporation, 
  • Certain shares or debts of connected corporations, or 
  • A combination of these two types of assets 
• The claimant was a founding investor at the time the corporation was initially capitalized and held the share for a minimum of five years prior to disposition
• At all times since the initial share subscription until the time that is immediately before the sale of the shares, the claimant directly owned shares amounting to more than 10 % of the fair market value of the issued and outstanding capital stock of the corporation and giving the individual more than 10 % of the votes that could be cast at an annual meeting of the shareholders of the corporation  
• Throughout the five-year period immediately before the disposition of the share, the claimant must have been actively engaged on a regular, continuous, and substantial basis in the activities of the business   
• The share does not represent a direct or indirect interest in a professional corporation, a corporation whose principal asset is the reputation or skill of one or more employees, or a corporation that carries on certain types of businesses including a business 
  • Operating in the financial, insurance, real estate, food and accommodation, arts, recreation, or entertainment sector; or 
  • Providing consulting or personal care services. 

In addition, the share must have been obtained for fair market value consideration.

Employee ownership trust tax exemption

An Employee ownership trust (EOT) is a trust that holds shares of a corporation for the benefit of the corporation's employees. An EOT can be used to facilitate a purchase of a corporation by its employees, as an additional option for business owners when planning for succession. The 2023 Budget introduced tax rules to facilitate the creation of EOTs. Continuing this effort, the 2023 Fall Economic Statement proposed to exempt the first $10 million in capital gains realized on the sale of a business to an EOT from taxation, subject to the following conditions:

• The individual, a personal trust of which the individual is a beneficiary, or a partnership in which the individual is a member, disposes of shares of a corporation that is not a professional corporation.
• The transaction is a qualifying business transfer (as defined in the proposed rules for EOTs) in which the trust acquiring the shares is not already an EOT or a similar trust with employee beneficiaries.
• Throughout the 24 months immediately prior to the qualifying business transfer:
  • The transferred shares were exclusively owned by the individual claiming the exemption, a related person, or a partnership in which the individual is a member; and
  • Over 50 % of the fair market value of the corporation’s assets were used principally in an active business.
• At any time prior to the qualifying business transfer, the individual (or their spouse or common-law partner) has been actively engaged in the qualifying business on a regular and continuous basis for a minimum period of 24 months.
• Immediately after the qualifying business transfer, at least 90 % of the beneficiaries of the EOT must be resident in Canada.

The $10 million exemption must be shared by all individuals that dispose of shares to an EOT as part of a qualifying business transfer. A disqualifying event will occur if the EOT loses its status as an EOT or if less than 50 % of the fair market value of the qualifying business’ shares is attributable to assets used principally in an active business at the beginning of two consecutive taxation years of the corporation. If this occurs within 36 months of the qualifying business transfer, the exemption would not be available or would be retroactively denied. If the event occurs more than 36 months following the transfer, the EOT would be deemed to realize a capital gain equal to the total amount of exempt capital gains.

Alternative minimum tax

The 2023 Budget announced significant changes to the alternative minimum tax (AMT) in response to the government’s concerns that too many high-income individuals pay little or no income tax in a given year because of certain tax incentives. Draft legislation was released in August 2023 with a proposed effective date of January 1, 2024.

The AMT is a parallel tax calculation for individuals that allows fewer deductions, exemptions, and tax credits to be deducted compared to the ordinary income tax rules. For any year, an individual pays AMT or regular federal income tax, whichever is higher. Where the AMT is more than regular income tax otherwise calculated, the additional tax paid can be carried forward for seven years to offset regular tax to the extent regular tax exceeds AMT in the carryforward period.

Of particular concern to the charitable sector is that under the first component of broadening the AMT base, the proposal includes adding 30% of capital gains on donations of publicly listed securities to the AMT base and disallowing 50% of non-refundable tax credits including the charitable donation tax credit. The impact of these changes is that there could be a substantial increase to the AMT for certain high-income individuals, and in particular, this proposal could disincentivize donors from supporting charitable organizations.

To address this concern, this Budget proposes to allow individuals to claim 80% (instead of the previously proposed 50%) of the charitable donation tax credit when calculating the AMT.

In addition, amendments are proposed to (1) allow deductions for the Guaranteed Income Supplement, social assistance, and workers’ compensation payments, (2) claim federal logging tax credit under the AMT, (3) exempt Employee Ownership Trusts from the AMT, and (4) allow certain disallowed credits under the AMT to be eligible for the AMT carry-forward (i.e., the federal political contribution tax credit, investment tax credits, and labour-sponsored funds tax credit).

Exemption for certain trusts for the benefit of Indigenous groups

This Budget proposes exemptions from the AMT for certain trusts that are established for the benefit of an Indigenous group, provided certain conditions are met. The government is consulting on these proposed exemptions for Indigenous settlement and community trusts and the consultation period ends June 28, 2024.

Effective date

The effective date of these amendments remains the same as the previously announced AMT changes and would also apply to taxation years that begin on or after January 1, 2024. Updated draft legislation is included in the Notices of Ways and Means Motions in the Budget documents.