Five ways private companies can make the most of the federal budget

Authored by: Ameer Abdulla, Partner at EY

Private companies can make the most of this year’s federal budget by diving into the details now and planning ahead.

In brief

• Canada's new fed programs boost growth for private firms.
• Capital gains, clean energy, real estate tax incentives.
• Enhanced support for research grants and innovation.

Privately held, owned and operated companies across Canada are well positioned to transform newly introduced federal programs and incentives into sustainable growth. By understanding these just-launched or reimagined measures now, you can seize opportunities or mitigate any potential impacts. The key lies in getting the right insight today so you can move forward with confidence.

What should private company owners keep in mind this spring?

1.    Plan ahead to navigate rising capital gain inclusion rates.
The federal budget introduced an increase in capital gain inclusion rates that will have implications for individuals and corporations alike. With the inclusion of capital gains set to jump from 50% to 66%, private business owners must understand: if you’re planning to sell property — think anything from a warehouse to a rental home to a family cottage — you’ll be paying more taxes on that capital gain after June 2024.

What should you think about now?

Go beyond short-term planning to crystalize a lower capital gains rate now. Consider how this proposed increase could impact your succession, retirement or estate planning and your strategy for mitigating the increased tax burden.

2.    Consider how to make the most of the proposed Canadian Entrepreneurs’ Incentive.

Existing or future business owners can tap into this new incentive, which is applicable in certain sectors. This $2 million exemption joins the existing $1.25 million lifetime capital gains exemption and employee ownership trust exemptions to offer another incentive for entrepreneurs to commercialize and scale budding businesses into powerful engines primed for growth.

To capitalize on the exemption, you can use it to mitigate taxes when selling shares of your business, as long as it’s Canadian owned and operated by you and you are, and have been, actively engaged in the company for at least five years. Once the exemption is fully phased in over the next 10 years, you’ll be able to combine it with the lifetime capital gains exemption and benefit from a lower rate of tax on up to $3.25 million of a full or partial sale of your business.

What should you think about now?

As a Canadian founder, take special care to ensure you have the correct structure in place early, offering you the flexibility to scale and capitalize on all possible exemptions.

3.    Explore possible ways to address climate change and sustainability through new incentives.
With newly released details on the Federal Clean Electricity Investment Tax Credit — as well as additional updates and refreshes to existing programs — there are many ways businesses can seize this moment to drive environmentally conscious innovation. We know that eligible Canadian corporations will be able to recover 15% of investments used towards equipment that generates energy from wind, solar and other renewable sources1.

The incentive also includes opportunities for businesses ready to invest in heat from nuclear fission, geothermal energy equipment, biowaste material management, natural forms of energy storage and more. In some cases, incentives also cover refurbishment of equipment.

Also of note: new incentives for businesses willing to invest in the electric vehicle (EV) supply chain and electrification of the grid overall.

With a 10-year runway to make the most of these opportunities, businesses across industries — especially those operating in the energy sector — can channel these developments into a lot of progress.

What should you think about now?

Companies that apply these incentives will need to meet rigorous reporting and compliance requirements. Explore those at the front end so you can use effective technology platforms and track the right data efficiently throughout your innovation and investment processes.

4.    Dig in to assess the upsides of new measures supporting real estate investments.
As the affordable housing crisis continues to make national headlines, the federal budget proposed a pair of measures intended to spark momentum on this front. Under the 2024 budget, businesses will be able to access an accelerated write-off of 10% of capital costs associated with purpose-built rental housing.

By accelerating the depreciation deduction, the proposal effectively reduces your tax burden early in the investment, incentivizing spending between now and 2031, as long as you break ground before then and qualify for inhabitable or occupancy certificates by 2036.

In addition, the budget introduced a measure to eliminate the limits on the deductibility of interest. This means you can more rapidly deduct the cost of a purpose-built rental building, at a lower tax rate, with greater incentives.

Of course, you must understand the nuances of these parameters and how they apply to your specific business and strategy before you can tap into their full potential.

What should you think about now?

If you’re a developer looking to capitalize on these incentives, you may want to start by identifying how to maximize these measures to increase cash flow or rates of return on planned investment projects or make new projects commercially viable.

5.    Look into enhanced support for research grants.
This year’s budget includes $3.5 billion in new strategic research infrastructure and federal research support. That spans investments in modern, high-quality research facilities that are essential for made-in-Canada breakthroughs in research and science.

Offering up $2.4 billion for core research grants to foster homegrown, top-tier research talent, the proposals aim to streamline and enhance scholarships and fellowships through Canada’s research-granting councils.

This development could have important upsides for privately owned and operated businesses as the talent base needed to increase productivity and drive cutting-edge developments grows.

It also aligns to the broader announcements that the government is launching a second phase of consultations on more specific Scientific Research and Experimental Development (SR&ED) tax and business incentives to hear further views from businesses and industry on specific and technical reforms.

As the innovation landscape evolves in Canada, businesses here will want to stay abreast of updates and contribute to that dialogue in the hopes of fostering even more opportunities for value-generating growth ahead.

What should you think about now?

If your organization is looking to maintain a robust research and innovation talent pipeline, explore where investments are being made locally, and the possible upsides or incentives around partnering with key institutions to bridge gaps now.