Canada Federal Budget 2024: A Guide to the Opportunities and Challenges for SMEs

Our summary of Canada’s 2024 budget focuses on challenges and opportunities for leaders of Canadian SMEs

Federal Budget: The Two Biggest Challenges for Canadian SMEs

The government has put forth a liberal budget (no pun intended), spending $535 billion. After-tax revenues, the deficit will be close to $40 billion. This deficit can create some outstanding economic implications—and we’ve identified these as the two biggest challenges for Canadian SMEs.

Capital Gains Tax

The change in the capital gains inclusion rate is increasing from 50% to 66.7%. This will have significant implications, particularly for medium-sized businesses and those in the asset management industry. The new inclusion rate will likely impact investment decisions and growth opportunities for the foreseeable future.

Individuals will still pay a 50% tax on the first $250,000 of capital gains. However, corporations and trusts have their entire capital gains taxed at the new inclusion rate.

The start-up economy relies heavily on capital gains as many new tech companies provide stock options for their employees in place of salaries, which are later taxed as capital gains rather than income tax. This could contribute to brain drain and encourage skilled tech workers to migrate to a country with a favourable inclusion rate, such as the US.

The CFIB (Canadian Federation of Independent Business) reports that the capital gains tax hike could discourage Canadians from starting or expanding small businesses, as private equity will now have less value. Also, any SME owner looking to sell all or part of their business will now face a substantial added tax burden.

However, in hopes of offsetting this burden, the 2024 Federal Budget proposed the Canadian Entrepreneurs’ Incentive, aiming to lower the capital gains tax on the sale of eligible business shares by individuals on the private market. Under this incentive, the inclusion rate on eligible capital gains is reduced to 33.3% for a lifetime maximum of $2 million. Unfortunately, this limit may not provide much relief for SME owners who were planning to sell in the near future.

Strategies to mitigate the capital gains tax burden could include crystalizing assets prior to July 2024 or selling during periods of high demand, should they present themselves. Other techniques like tax-loss harvesting or identifying optimal investment accounts like a capital dividend account might be viable options as well.

Taxing Unused Land

The 2024 budget proposes an economic plan to start taxing unused land. The purpose of this change is to encourage home construction during the current housing shortage. Unfortunately for developers, this will create an added expense on their land that is waiting for funding, materials, labour, opportune time, or delayed due to red tape.

Developers pay property tax and sometimes farm tax on the land in their portfolios. The added unused land tax will be added on top of those.

This amendment may spur development in the short term as home builders push to start construction to avoid this tax. However, this tax will likely create hesitation among builders when purchasing property in the future and could slow down investment and construction long term.  

We encourage SMEs to advocate for increased consultation regarding vacant land. Much of it remains unused for reasons unrelated to residential housing development. This could prompt discussions on policy adjustments and exemptions related to such idle land.

Consultations are planned to commence later this year. Stay informed and actively participate, especially if you are dealing with unused properties.

Federal Budget Overview: The Biggest Opportunities for Leaders of Canadian SMEs

The Federal Budget has proposed actions that might prove useful to some businesses. However, it’s still too early to tell how these measures will be rolled out and how effective they will be. Keep an eye out for how the following changes will be implemented to see if they can be useful for you and your business.

Changes to Alternative Minimum Tax

Crystia Freeland put forward a plan in the budget to revise the tax treatment of charitable donations when calculating Alternative Minimum Tax (AMT). This will allow an individual to claim 80% of the charitable donation tax credit, an increase from 50%.

What this means for your business: You can support charitable causes while benefiting from increased tax savings.

Red Tape Reduction Act

This plan aims to enable innovation by offering some exemptions to current regulations, streamlining the regulatory system, and reforming regulations for modern business practices.

What this means for your business: Ideally, with reduced regulatory burdens, you will be able to allocate more resources toward innovation and strategy. This could potentially accelerate growth and competitiveness.

Tax Cuts for Small Businesses

Crystia Freeland plans to gradually phase out small business tax rates to support Canada’s growing small enterprises.

What this means for your business: With lower tax burdens, you can retain more profits for reinvestment and drive long-term growth. When this action will be put into place is yet to be announced.

Small Business Financing Program Enhancement

Increased financing opportunities for small businesses by an estimated $560 million.

What this means for your business: Access to additional financing can support your business expansion plans, whether it’s investing in new equipment, expanding into new markets, or funding research and development initiatives.

EOT Exemption

Exemption of the first $10 million in capital gains from taxation on the sale of a business to an Employee-Owned Trust (EOT). This exemption is subject to conditions.

What this means for your business: Selling your business to an Employee-Owned Trust provides a tax advantage and promotes continuity, loyalty, and stability among your workforce.

AI Compute Access Fund

The federal budget has allocated $2.4 billion for targeted AI support, including launching a new AI Compute Access Fund.

As reported in the CEO Confidence Index survey, many TEC Canada CEOs are investing in AI technologies. Eligible SMEs can potentially access this investment program to their advantage. As of now, specific eligibility criteria for accessing this fund have not been announced, but keep an eye on official government pages in the future.

And Finally…A Carbon Tax Rebate for SMEs?

Crystia Freeland has now promised to return the $2.5 billion in rebates owed to SMEs from carbon taxes collected since 2019. Going forward, businesses will only receive 5% of the rebate compared to the previous 9% rate. The date when the rebate will be returned hasn’t been specified, but the deadline for filing is July 15th 2024.

The carbon tax rebate could be an opportunity for SMEs to reinvest in their operations following the financial strain of high carbon tax payments. With looming prospects of future carbon tax hikes, SMEs may wish to prioritize investments in operational efficiency.

While this rebate might provide some temporary relief for businesses, costs will likely continue to rise as essential services depend on these energy sources. Those increased costs will be passed along the supply chain to be absorbed by SMEs and consumers.

The 2024 Federal Budget offers a mixed bag of burdens and benefits for Canada’s entrepreneurs and high-growth companies.

Don’t navigate them alone. At TEC Canada, we provide business leaders with support and expertise through our unique peer group and mentorship format.

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