The Canadian federal budget for the fiscal years of 2024–25 was presented to the House of Commons by Finance Minister Chrystia Freeland on 16 April 2024. The impact of Canada’s 2024-25 budget on small businesses comes in the form of both challenges and opportunities. It is too early to predict the long-term effects of this budget. But understanding the important points will assist the small business owners in making informed decisions, propelling their business forward. We can help you carefully plan and execute your financial strategy to minimize liabilities while maximizing your after-tax savings.

The Federal budget 2024-25 can easily be divided into two parts for small businesses. One, the part that you are reading right now, explains all the positive factors introduced in the budget that contribute towards the growth of small businesses in Ontario and other areas of Canada. The second part coming this Monday, will elaborate the negative critique on those parts of budget that are being deemed negative by the small business community.

Impact of Canada’s budget 2024-25 on Small Businesses

Carbon Rebate for Small Businesses

Federal Budget 2024-25 introduces the Canada Carbon Rebate, a refundable tax credit for small businesses with 499 or fewer employees. The rebate aims to return proceeds from pollution pricing (made in 2019-20 through 2023-24) to approximately 600,000 eligible businesses in provinces where the federal backstop applies. Eligible businesses can receive over $2.5 billion in direct payments by filing their taxes. Take advantage of our small business experts to see if you qualify and apply for small business tax credits.

Increased Lifetime Capital Gains Exemption (LCGE)

Effective June 25, 2024, the Lifetime Capital Gains Exemption has increased up to $1.25 million, from the current amount of $1,016,836. This exemption allows individuals to enjoy tax-free capital gains on the sale of small business shares, farming, and fishing property. The value of the exemption will automatically increase each year to keep up with rising prices.

The LCGE is designed in part to help encourage risk-taking among small business owners of Canada. It allows entrepreneurs to claim deductions to their taxable income for capital gains when they sell qualified small business shares that they have held for at least two years in Canadian-controlled private corporations (CCPCs). A company must be privately held with an aggregate of shareholders that is more than 50 percent Canadian to be a CCPC.

Canadian Entrepreneurs’ Incentive (CEI)

The introduction of this new incentive is another significiant positive impact of Canada’s 2024-25 budget on small businesses. This incentive works by reducing the inclusion rate of up to 33.3% on a lifetime maximum of $2 million in eligible capital gains to make selling a business more attractive for Canadian business owners. Here’s a simplified explanation to help you understand this incentive:

Capital Gains Tax:

• When you sell an asset (like a small business) for more than you bought it for, you make a capital gain.
• The government taxes a portion of this capital gain as income.
• Before this incentive, only half of the capital gain would be included in your income for tax purposes (inclusion rate).

The Incentive:

• This program offers a reduced inclusion rate for business owners.
• Instead of the usual 50% inclusion, it can be as low as 66.7% (33.3% reduction).
• This means a smaller portion of your capital gain is taxed, lowering your overall tax bill.

Lifetime Maximum:

• This benefit applies to a maximum of $2 million in eligible capital gains.
• Any capital gains exceeding this amount would be taxed at the regular inclusion rate.

POV of an Investor as an Example:

Imagine yourself as an investor based in Canada. You bought a small business back in the day and now you want to sell it, for a profit of $4 million. Here’s how the tax situation would differ with and without the incentive:

• Without the Incentive:
  • Your capital gain is $4 million.
  • 50% of it (inclusion rate) is included in your income for tax purposes, which is $2 million.
  • You pay taxes on this $2 million.
• With the Incentive (assuming you qualify for the full reduction):
  • Your capital gain is still $4 million.
  • But only 66.7% of it is included in your income ($4 million x 66.7%) which is $2.67 million.
  • You pay taxes on this lower amount, saving you money compared to the first scenario.

This is a simplified example. There might be other factors affecting your specific situation. It’s always best to consult with a tax professional to determine your eligibility for Canadian Entrepreneur’s Incentive.

The government designed this incentive with the tech sector in mind. This was modelled after the qualified small business stock exemption in the United States (US). Entrepreneurs will have a combined total and partial exemption of at least $3.25 million when selling all or part of a business. Thus they will be able to use significant tax savings and greater financial flexibility when exiting a venture.

Limitations of CEI

The incentive will be available to entrepreneurs and founding investors who own at least 10 percent of shares in a business. This ownership stake should also have been their principal employment for at least five years. The government plans to phase in the CEI gradually over the next 10 years by $200,000 annually. Beginning in 2025, this will reach the $2 million mark by 2034.

Investment in Canadian Start-ups through the Venture Capital Catalyst Initiative:

The Canadian government is giving a helping hand to promising startups through the Venture Capital Catalyst Initiative (VCCI). Here’s a breakdown:

• Investment: The government is allocating $200 million over two fiscal years, starting in April 2026 (2026-27 tax year).
• Goal: Increase access to venture capital (VC) funding for deserving entrepreneurs.

What is Venture Capital?

Venture capital firms invest in early-stage, high-growth companies with the potential for big returns. However, securing VC funding can be challenging for startups. This initiative aims to bridge the gap by making it easier for promising startups, particularly those led by “equity-deserving” entrepreneurs, to access VC funding. “Equity-deserving” generally refers to businesses with strong potential for growth and profitability, making them attractive investment opportunities.

Boosting Government Procurement from Small and Medium-sized Businesses:

Budget 2024 includes measures to enhance government procurement from innovative small and medium-sized businesses. The government intends to propose legislated procurement targets for these businesses, promoting opportunities for them to participate in government contracts.

Turn Opportunities into Actionable Strategies

While the increased LCGE and the CEI hold promise for Canada’s small businesses, capitalizing on these opportunities requires careful planning. The tax relief from the LCGE could free up capital for reinvestment or expansion. The CEI could also attract new investment for startups and growing businesses. However, navigating through the impact of Canada’s 2024-25 budget on small businesses, and using it efficiently to maximize your benefits can be say, a bit complex!

CFO Services for Small Businesses in GTA

Therefore, our team of experienced financial professionals is dedicated to empowering small businesses using their financial data. Here’s how your business will grow after partnering with our CFO Services for Small Businesses in GTA:

• Tax Planning and Strategy: We’ll analyze the impact of Budget 2024 on your specific tax situation and develop a business plan that optimizes your benefits from the LCGE and other relevant tax measures. This will minimize your tax burden and maximize your after-tax profits.
• Financial Analysis and Forecasting: We can conduct a comprehensive financial analysis to assess the potential impact of the budget on your cash flow, profitability, and overall financial health. This proactive approach allows you to anticipate any potential challenges and identify areas for optimization.
• Cash Flow Management: We can help you develop data-driven strategies to optimize your cash flow, taking into account any potential changes in revenue or expenses arising from the budget 2024-25. You will have the necessary resources to seize new opportunities and navigate any potential economic fluctuations.
• Compliance with Regulations: We stay up-to-date on the changing tax regulations and deadlines associated with Budget 2024-25, ensuring your business remains compliant. This eliminates the risk of penalties and allows you to focus on running your business with confidence.

As a local financial firm based in Mississauga, we understand the unique challenges and opportunities facing small businesses in and around the Greater Toronto Area (GTA). Our personalized CFO services is tailored to provide financial (and operational) solutions for your business as and when required. We can provide the financial guidance and support you need to successfully go through this changing economic landscape.