Some industries say they are disappointed and confused by the federal government’s decision to leave them out of a new tax break for small businesses that is modelled closely on a U.S. policy.
Tuesday’s federal budget saw an increase in capital-gains taxes that would affect owners who sell shares or ownership in their businesses. Two-thirds of the capital gains would be taxable, up from one-half previously, for corporations and for individuals who are realizing more than $250,000 in capital gains.
To partially offset this, the government is increasing the lifetime capital-gains exemption on the sale of small-business shares to $1.25-million, up from $1-million. And it is introducing a new Canadian Entrepreneurs Initiative, which would see only a third of the capital gains from a small-business sale taxed, up to a lifetime limit of $2-million. (However, the value of the limit is phased in over time and only reaches $2-million in 2034.)
“Combined with the enhanced lifetime capital gains exemption, when this incentive is fully rolled out, entrepreneurs will have a combined exemption of at least $3.25 million when selling all or part of a business,” the budget states.
But the budget detailed a number of conditions that must be met to access the tax break. Those conditions include being a founding owner in the company and holding shares for at least five years prior to the sale.
And companies in many industries are being excluded from the break, including those operating in food services, hospitality, insurance, real estate and personal-care services, such as salons. Professional corporations – such as those used by doctors or accountants – are also excluded.
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The Tourism Industry Association of Canada (TIAC) said the tax changes could affect the decisions of both domestic and foreign investors interested in entering or expanding into the Canadian market.
“TIAC is currently assessing the full implications of these tax changes on our members, especially hotel owners and operators who might be considering selling their businesses,” spokesperson Michel Boyer said.
Restaurants Canada said that it welcomed some budget measures, such as the long-awaited carbon-price rebate for small and medium-sized businesses. However, the industry group said in an unsigned statement that it was disappointed that its members were kept out of the tax break.
“We urge Minister Freeland to revise the program details to ensure the foodservice sector has access to this reduced tax rate,” Restaurants Canada said in a statement, referring to Finance Minister Chrystia Freeland.
The budget does not offer a rationale for why some industries are excluded from the tax advantages.
Ms. Freeland’s office said the point of the tax break was to incentivize the creation of innovative and high-risk businesses, and that it was greatly inspired by the qualified small business stock tax break in the United States.
According to the U.S. Internal Revenue Code, that tax break excludes businesses in fields such as law, engineering or architecture, “where the principal asset of such trade or business is the reputation or skill of 1 more of its employees.” It also excludes additional industries such as hotels and farms. The policy was enacted in 1993 and meant to focus on capital-intensive industries such as manufacturing.
Tuesday’s Canadian budget includes similar language to the U.S. code, saying the excluded industries include those “whose principal asset is the reputation or skill of one or more employees.”
The budget said the Canadian Entrepreneurs Initiative will come into effect on dispositions on or after Jan. 1, 2025.
With a report from Irene Galea
Chris Hannay