Canada’s Tax Changes: Capital Gains, Entrepreneur Incentive & Interest Rates

As the Canadian tax landscape evolves, it’s important for individuals and businesses to stay informed on recent changes that may affect their financial planning. In this blog, we’ll break down key updates, such as the increase in the Lifetime Capital Gains Exemption (LCGE), the cancellation of the proposed capital gains inclusion rate increase, the new Canadian Entrepreneurs Incentive, and the prescribed interest rate for late installments. Understanding how to plan for capital gains tax changes in Canada, along with these other updates, can help you navigate your tax obligations and seize new opportunities for effective financial planning.

Lifetime Capital Gains Exemption (LCGE) Limit in Canada Increased

The Lifetime Capital Gains Exemption (LCGE) allows Canadians to be exempt from tax on the sale of certain types of assets, such as shares in small businesses, farming property, and fishing property. Previously, the LCGE limit was set at $1,016,836. However, as of June 25, 2024, this amount is being boosted to $1,250,000. This increase is a welcome development for many Canadians, particularly business owners, as it allows more of the proceeds from the sale of eligible properties to be exempt from capital gains tax. This change in the Capital Gains Exemption limit in Canada not only offers immediate benefits but also helps counterbalance the upcoming increase in the capital gains inclusion rate. For those planning to sell their small business or farming property, this is an advantageous time. The increased LCGE provides greater financial flexibility, making it a key consideration in succession planning.

Planning Tip: If you’re anticipating a capital gain that may fall within the newly expanded Lifetime Capital Gains Exemption limit in Canada, it’s a good idea to consult with accountants in St. Catharines to understand the full extent of tax savings. By doing so, you can ensure your transaction is optimized to take full advantage of the exemption.

Cancellation of the Capital Gains Inclusion Rate Increase

On March 21, 2025, Prime Minister Carney announced that the Government of Canada would cancel the proposed hike in the capital gains inclusion rate. Originally, the plan was to increase the capital gains inclusion rate from 50% to 66.67% on gains about $250,000. However, this increase has been completely scrapped. The decision to cancel the hike reflects the government’s commitment to supporting builders, small businesses, and investors who play a vital role in shaping Canada’s future. At the same time, the government will maintain the increase in the Lifetime Capital Gains Exemption limit to $1,250,000 for small business shares, farming property, and fishing property. Legislation for this increase will be introduced in due course. This move is part of a broader strategy to incentivize investment, encourage economic growth, and reward business owners for taking risks and contributing to Canada’s economy.

What Does This Mean for You?

• If you’ve already realized your gains: You are unaffected by this cancellation, as the inclusion rate remains at 50%.
• If you have capital gains to realize: There’s no need to accelerate your transactions to avoid an increased rate. The inclusion rate will remain steady at 50%, allowing for more flexibility in your financial planning.
• For business owners and investors: This is a significant win, as it helps preserve more of your capital gains, which can be reinvested into business growth, real estate, or other financial ventures.

Canadian Entrepreneurs Incentive

The Canadian Entrepreneurs Incentive is a new program announced in the 2024 federal budget to help entrepreneurs grow their businesses and encourage innovation. This incentive offers a tax break by reducing the capital gains inclusion rate to 33.33% on eligible capital gains, up to a maximum of $2 million. It’s specifically designed for entrepreneurs in sectors like technology and manufacturing who are looking to scale their businesses. The incentive allows entrepreneurs to keep more of their gains, giving them more money to reinvest into their businesses and support economic growth. When fully implemented, this will work alongside the increased LCGE, offering tax savings on up to $6.25 million in capital gains.

Key Features of the Canadian Entrepreneurs Incentive:

• Eligibility: The incentive applies to business owners who have at least 10% ownership in their business and have worked as the company’s principal employee for at least five years.
• Incentive Amount: The incentive allows business owners to qualify for a 33.33% inclusion rate on $2 million of eligible capital gains. Over time, this cap will rise by $200,000 annually, reaching $2 million by 2034.
• When Fully Implemented: Entrepreneurs will enjoy combined full and partial capital gains exemptions of up to $3.25 million when selling their businesses.

This incentive is aimed at encouraging Canadian entrepreneurs to continue innovating within the country. It supports the government’s goal of boosting Canada’s economic growth and global competitiveness. The Canadian Entrepreneurs Incentive is especially helpful for those involved in tech start-ups or innovative manufacturing, where gaining access to capital can often be a challenge when trying to scale operations.

Combining the Canadian Entrepreneurs Incentive with the LCGE

The key question here is whether the Canadian Entrepreneurs Incentive can be combined with the Lifetime Capital Gains Exemption (LCGE). The short answer is yes—these two tax benefits can be combined.

• LCGE: This exemption applies to capital gains realized from the sale of small business shares, farming property, and fishing property.
• Canadian Entrepreneurs Incentive: This incentive targets gains from the sale of business shares owned by entrepreneurs in certain industries and helps reinvest those gains into future ventures.

If you’re an entrepreneur with eligible capital gains of up to $6.25 million, you will benefit from both the LCGE and the Canadian Entrepreneurs Incentive, significantly reducing your tax burden.

Planning Tip: If you’re a business owner, this is an excellent opportunity to plan the sale of your business or to scale your operations. Work with accountants in St. Catharines or your trusted tax advisor to map out a strategy that leverages both the LCGE and the Canadian Entrepreneurs Incentive.

Prescribed Interest Rate for Late Installments and Balances Due

The Canada Revenue Agency (CRA) has set the prescribed interest rate for the second quarter of 2025 at 8% on overdue amounts, including taxes, Canada Pension Plan contributions, and employment insurance premiums. If you have unpaid balances or late installments, this interest rate can add up quickly. It’s important to keep track of your balances to avoid accumulating high interest charges.

Key Details About the Prescribed Interest Rates:

• Overdue Balances: Individuals and corporations who owe taxes will be charged 8% interest on the overdue amount.
• Corporate overpayments: Companies who have overpaid their taxes will receive 4% interest on overpayments.
• Non-corporate overpayments: For individuals, the overpayment interest rate is 6%.

Since these rates are reviewed and adjusted every quarter, they could change in the future, making it important to plan for possible increases. If you owe the CRA, it’s a good idea to pay off your balance as soon as you can to avoid extra interest charges.

Planning Tip: If you have late installments or unpaid balances, try to pay them off before the end of the second quarter. If paying in full isn’t possible, consider setting up a payment plan to reduce interest.

Take Control of Your Taxes with Professional Accountants in St. Catharines The changes in capital gains exemptions, the Canadian Entrepreneurs Incentive, and prescribed interest rates bring both opportunities and challenges. For small business owners and entrepreneurs, these updates can reduce tax burdens, allowing them to keep more of their profits for reinvestment and growth. However, individuals with overdue taxes should be aware of the increase in prescribed interest rates and take steps to avoid additional charges. At DDL & Co., we understand that navigating changes in tax legislation can be tricky. Our team of expert accountants and advisors is here to help you understand how these updates affect your situation. Whether you need assistance with filing your tax return in St. Catharines, advice on planning for capital gains tax changes, or support with assurance & accounting, we’re here to provide personalized guidance. Ready to take control of your taxes and make the most of these changes? Reach out to DDL & Co. today for professional tax advice and support. Let us help you plan for a better financial future.