Access to the Canadian entrepreneurs’ incentive (CEI) can be enhanced through use of the capital gains reserve

The Canadian entrepreneurs’ incentive (CEI) in draft s.110.63 reduces to 1/3 the inclusion rate for capital gains realized on the disposition of, for example, qualified small business corporation shares, where specified conditions are satisfied. It is apparently still contemplated that it will apply to up to $400,000 of capital gains in 2025, which will increase by $400,000 each year until a lifetime maximum of $2 million is reached in 2029.

Access to the CEI can be enhanced through use of the capital gains reserve.

For example, in 2025 an entrepreneur sells shares, qualifying for the CEI and having an ACB of $100, for $2,000,100. $400,020 is payable immediately, and the balance of $1,600,080 is to be paid equally as to $400,020 in each of the next four years. The entrepreneur will be able to claim a reserve each year, allowing the inclusion of a capital gain of $400,000 per year until 2029, thereby benefiting from the increase in the limit and enabling CEI claims for the years 2026 to 2029.

Neal Armstrong. Summary of Julien Théberge, “Benefiting from the Annual Increase in the CEI Limit by Using a Capital Gain Reserve,” Canadian Tax Focus, Vol. 15, No, 1, February 2025, p. 2 under s. 110.63(2).