Feds Announce Changes to Canadian Entrepreneurs’ Incentive

In April, the federal budget introduced an increase on the tax rate on capital gains. Previously, individuals were taxed on one-half of any capital gains, but the new budget proposed to increase this rate to two-thirds. This announcement sparked concern with Canadian tech leaders that the proposed tax increase would harm Canada’s tech ecosystem by having a chilling effect on local investment.

In an effort to assuage concerns, the federal government developed the Canadian Entrepreneur’s Incentive (CEI) to help ease the tax burden on entrepreneurs in two ways. First, with respect to the sale of a business, the incentive would reduce the inclusion rate to only one-third on a lifetime maximum of $2 million of capital gains. Further, entrepreneurs would be eligible for an additional $1.25 million lifetime capital gains exemption.

This past week after a series of consultations, the federal government has proposed a series of changes to the CEI, including expanding the eligibility to more small businesses and accelerating its phase-in period.

However, some members of Canada’s tech ecosystem are still unhappy with the CEI. Communitech president and CEO, Chris Albinson, says the changes are a step in the right direction, but fall short of incentivizing Canadian entrepreneurship. Notably, the changes do not address eligibility for employees, angels or early-stage investors, which leave a significant proportions of tech investors out of the exemptions. It remains to be seen how the Canadian government will address these concerns.