So, What Do We Need to Worry About This Tax Season? (Pt. 2)

Government of Canada Wrapped 2024 - Part Two 🎁

Welcome back! If you joined us for Part One, you’ll remember we dove into a few of the highs and lows of the 2024 tax announcements. And let’s be honest: the sharp hike in the capital gains inclusion rate was the headline grabber—and not in a good way. It hit families, retirees, and anyone trying to hold onto their hard-earned wealth like a ton of bricks.

But it’s not all doom and gloom. While the inclusion rate hike left us a bit nervous, the government has thrown us a couple of lifelines when it comes to dealing with it. In Part Two, we’re turning our focus to the two silver linings designed to ease the pain: the Canadian Entrepreneurship Incentive (CEI) and the Lifetime Capital Gains Exemption (LCGE) increase. These are key tools to help us fight back against the hike on capital gains.

Let’s get into it.

How to Fight the Capital Gains Tax Hike

1. Canadian Entrepreneurship Incentive (CEI)

Starting in 2025, the Canadian Entrepreneurship Incentive (CEI) reduces the sting of the capital gains inclusion rate hike. It lowers the taxable portion of your gains from 50% (or potentially 66.67%) to 33.3%, but only for qualifying business sales. This basically means that less of your gain will be up for taxing.

How it works:

• Annual limits: In 2025, up to $400,000 of your eligible gains qualify for the reduced rate. This limit eventually scales up to $2 million in total by 2029 (they’re adding to it bit by bit annually).

• Eligibility: This is for hands-on entrepreneurs, not passive investors or short-term owners. You must have owned the business for at least 24 months and played an active role in its operations.

Example: If you sell your small business in 2026 for a $1 million gain, only $333,300 will be taxable under the CEI, compared to $500,000 (or potentially $666,667) without it. At a 30% tax rate, that’s $50,000 saved—real money you can reinvest or keep for retirement.

Why this matters: The CEI offsets the damage caused by the capital gains inclusion rate hike, especially for business owners. Without it, the same $1 million gain would have $666,700 taxable, costing an additional $50,000 in taxes. The CEI is proof that, sometimes, even governments listen to backlash and adjust course.

By 2029, eligible entrepreneurs could save up to $100,200 in taxes payable on a $2 million gain, making this a huge win for long-term business owners.

2. LCGE Increase: A Perfect Pairing with the CEI

The Lifetime Capital Gains Exemption (LCGE) increase adds another layer of protection for business owners. With the exemption raised to $1.25 million, more of your profits are shielded from taxes when selling qualifying assets.

How it works:
When you sell assets like a business or farmland, the LCGE allows you to exclude up to $1.25 million of your capital gains from taxes. This is especially important in the current tax landscape, given the inclusion rate for gains over $250,000 has jumped to 66.67%.

Example: You sell your business for a $1.5 million gain, and $1.25 million of that gain is tax-free. The remaining $250,000 is taxable at the capital gains inclusion rate. At a 30% tax rate, you’d owe $50,000 in taxes, compared to over $150,000 without the LCGE.

Why this matters: Combined with the CEI, the LCGE offers a powerful tax-saving strategy. While the CEI reduces the inclusion rate for eligible business gains, the LCGE allows you to exclude a large portion of those gains entirely. These two measures are most impactful when used together. The LCGE shields a significant portion of your gains upfront, while the CEI reduces the tax burden on any remaining taxable gains. For example, a $1.5 million business sale could see over $1.25 million exempted under the LCGE, and the remaining $250,000 taxed at the lower CEI inclusion rate of 33.3%.

The result? A dramatically reduced tax bill, more money for reinvestment or retirement, and a softer landing for entrepreneurs navigating today’s tougher tax environment.

A Tip: If multiple family members own shares in your business, each can use their own LCGE, multiplying the benefit. With smart planning, the tax savings can be substantial.

Looking Ahead

That wraps up Part Two of Government Wrapped, where we explored the silver linings that help soften the blow of the capital gains inclusion rate hike. While the CEI and LCGE are key wins for business owners, there’s still more to uncover.

In the next and final part of this series, we’ll shift focus to changes that affect individuals—think rental property owners, investors, and everyday taxpayers. Stay tuned—it’ll drop tomorrow!

Got questions about how these updates might apply to you? Hit reply—I’d love to hear from you and help you navigate what’s ahead.

P.S. Send this to someone and have them hit that button below. Not only will you help them save at least $1 in 2025, but I might give you something nice if you do it!