Liberals making changes to capital gains rules, but business advocates still concerned

The Liberal government is making some changes to a capital gains tax exemption applied when a business owner sells their shares, but advocates say it doesn't go far enough.

April's federal budget announced an increase to the taxable «inclusion rate» on capital gains — the profits that individuals or businesses make from selling an asset like a stock or a second home.

The new rules increased the inclusion rate from one-half to two-thirds on capital gains above $250,000 for individuals, and on all capital gains earned by corporations and trusts.

The budget also announced a reduction in the inclusion rate when an individual sells shares they own in their business. Dubbed the 'Canada Entrepreneurs' Incentive' (CEI), the exemption reduces the capital gains inclusion rate to 33 per cent on a lifetime maximum of $2 million.

But on Monday, the government announced it was making changes to the business exemption by expanding its eligibility and speeding up its rollout.

The budget stated that only founding members of a business who hold 10 per cent or more of its shares would be eligible for the exemption. The government is now eliminating the founder requirement and reducing the ownership level requirement to 5 per cent.

The amount of time an owner has to be active in the day-to-day operations of their business in order to benefit from the exemption has been reduced from five years to three.

The $2 million cap was also supposed to be phased in over a ten years, but is now set to be phased in over five — increasing by $400,000 per year. The sale of fishing and farming property will now also qualify for the exemption.

But business advocates argue that the exemption for owners' shares doesn't offset the overall increase to the capital gains