Some industries are confused and disappointed by the decision of the federal government to exclude them from a tax incentive for small business that closely resembles a U.S. model.
Tuesday’s federal budget Capital gains taxes have increased, affecting owners of businesses who are selling shares. For corporations and individuals realizing capital gains of more than $250,000.
The government will increase the exemption for capital gains on lifetime sales to partially offset the tax. small-business Shares will now be worth $1.25 million, compared to the previous $1 million. It is also introducing the Canadian Entrepreneurs Initiative which will only tax a third capital gains on a sale of a small business, with a limit lifetime of $2 million. The limit will be phased-in over the years and reach $2 million in 2034.
The budget says that when the incentive is fully implemented, the entrepreneurs can get a combined tax exemption of $3.25million when they sell all or part their business.
The budget outlined a few conditions to meet in order to qualify for the tax credit. The conditions for the tax break include holding the shares of the company at least 5 years before the sale and being the founder owner.
Companies in many different industries, like food service, hospitality, insurance and real estate, as well as personal care services such salons, are excluded. Also excluded are professional corporations, such as accountants or doctors.
Tourism Industry Association of Canada said that the changes in tax could impact the decision of domestic as well as foreign investors who are interested in expanding or entering the Canadian market.
Michel Boyer, TIAC spokesperson said: “TIAC has been assessing all the implications that these changes in tax will have on its members. This includes hotel operators and owners who may be thinking of selling their business.”
Restaurants Canada welcomed certain budget measures such as carbon price rebates for small businesses. The industry group, however, said that in a statement not signed that they were disappointed to find that their members weren’t eligible for the tax credit.
Restaurants Canada, in response to the Finance Minister’s statement: “We ask Minister Freeland that she revise program details so the foodservice industry can access this tax reduction rate.” Chrystia Freeland.
Budget does not explain why certain industries are exempt from tax benefits.
The office of Ms. Freeland said that the purpose of this tax incentive was to encourage the creation of high-risk and innovative businesses. It was inspired in part by the small business qualified stock tax exemption in the United States.
The U.S. Internal Revenue Code states that this tax incentive excludes companies in industries like law, engineering, or architecture “where the main asset is the reputation of one or more employees of the business.” Other industries are also excluded, such as farms and hotels. This policy, which was implemented in 1993, aimed to promote capital-intensive sectors such as manufacturing.
The Canadian Budget of Tuesday includes language similar to that in the U.S. Code, stating the industries excluded include “those whose main asset is their reputation or skills.”
Budget stated that the Canadian Entrepreneurs Initiative would come into force on all dispositions made on or after January 1, 2025.
Irene Galea provides a detailed report