Charting the path of Canada’s SMBs

Originally published May 8, 2024. For the latest developments, read TaxNewsFlash.

In the latest KPMG Business Survey – Federal Budget 2024 Edition, 534 small-to-medium sized (SMB) business leaders across Canada, including private companies and family businesses, shared their views and strategies on how they’re charting a path forward. While many Canadian business leaders are confident about their company’s growth prospects, the majority are also worried about prolonged, weak economic growth due to domestic and international factors, such as geopolitical conflicts and slow global growth.

Privately-held companies were more likely to agree (87 per cent) than their public counterparts that government incentives and tax relief should be made available to businesses to fuel innovation and economic growth. Amid the need to grow, the majority of business leaders (89 per cent) also agreed that it’s critical the federal government return the country to balanced budgets.

Canada’s Deputy Prime Minister and Finance Minister Chrystia Freeland delivered the 2024 Federal Budget in the House of Commons on April 16, 2024. This year’s budget focused on economic growth and productivity, addressing affordability and the housing crisis and fairness for all generations.

Several new measures were announced impacting businesses and individuals across Canada highlighted below.

85% worry that Canada will experience prolonged, weak economic growth

89% agree it’s imperative that Canada’s finances are on a steady sustainable track

As market uncertainty remains, business leaders continue to identify and prioritize key actions that will help them become more resilient while fostering growth, productivity, and innovation.

Mary Jo Fedy

Chief Financial Officer

KPMG in Canada

Evolving tax landscape | Growth and innovation | Reaching climate goals | Navigating transitions | Looking ahead

Evolving tax landscape

One of the most significant announcements in the budget is the proposed increase to the capital gains inclusion rate from one-half to two-thirds for trusts and corporations, and from one-half to two-thirds for individuals on the portion of capital gains that exceeds $250,000 realized on or after June 25, 2024.

However, the increased Lifetime Capital Gains Exemption (LCGE) will exempt up to $1.25 million in capital gains on the sale of qualifying small business shares and farming and fishing properties, which will apply to dispositions on or after June 25, 2024.

Changes were also proposed to the Alternative Minimum Tax (AMT) allowing individuals to claim an increased donation tax credit, which adjust previous revisions first announced in the 2023 budget. AMT is a parallel tax calculation that has fewer tax credits, deductions, and exemptions compared to regular personal income tax rules; taxpayers will pay whichever is highest.

Private enterprises want to innovate, create jobs, and invest in AI, machinery and equipment. There are some encouraging measures in this year’s budget for business owners to help them grow and monetize on their entrepreneurial investments.

Dino Infanti

Partner and National Leader, KPMG Private Enterprise Tax

KPMG in Canada

Growth and innovation

The budget proposed several new measures, including enhancements to the Canada Small Business Financing Program, by increasing annual financing to small businesses by an estimated $560 million.

The Canadian Entrepreneurs’ Incentive (CEI) aims to provide some additional tax benefits to entrepreneurs on the sale of shares of their business. The CEI can help reduce the tax rate on a lifetime maximum in eligible capital gains. When this incentive is fully rolled out, entrepreneurs may have a combined exemption of up to $3.25 million when selling all or part of a business.

There also continues to be high demand for the Scientific Research and Experimental Development (SR&ED) program across Canada, with more than eight in 10 business leaders (84 per cent) citing they would like the program to be simplified and expanded to encourage more investment in the innovations that create economic prosperity. The budget summarized the government’s continued efforts to modernize and enhance the SR&ED tax incentive program. A second stakeholder consultation launched on April 25, 2024, with more details to be announced.

87% agreed SR&ED is an effective tool for supporting innovation and business productivity

85% agreed that interest rates and borrowing costs are impeding their ability to expand or grow

There was also a major focus in the budget on strengthening Canada’s AI infrastructure with a $2.4 billion package to help fund AI compute infrastructure and to increase AI business adoption. This will include investing in the National Research Council’s AI Assist Program, which is aimed at helping SMBs scale up and increase productivity by building and deploying new AI solutions.

Reaching climate goals

Business leaders agree government incentives are a critical factor for financing emission reduction plans. While 79 per cent of respondents in our survey indicated they had a plan to achieve net-zero targets, the vast majority (90 per cent) also indicated that green incentives need to be fast-tracked to turn those plans into reality. Government programs and incentives were identified as a critical source of funding for these plans, with 83 per cent of respondents agreeing their organization needs more assistance and/or incentives to decarbonize.

The budget introduced a new Canada Carbon Rebate for Small Businesses, an automatic tax credit that the government says will return fuel charge proceeds to an estimated 600,000 small businesses with fewer than 500 employees. The budget also provided some additional details on previously announced tax credits, including the Clean Electricity Investment Tax Credit, which proposes a 15 per cent credit on the capital cost of eligible property expenditures.

Navigating transitions

According to our recent KPMG Private Enterprise Business Survey succession planning is gaining momentum, particularly for family-owned businesses, with the majority (75 per cent) planning to accelerate their transition plans due to many factors including continued economic uncertainty, mounting cost and technological pressures, and a desire to retire earlier than expected.

An Employee Ownership Trust (EOT) is a structured framework that can allow business owners to transition ownership of the business to employees, in a manner that can help preserve the family’s and business’ legacy and values.

The budget introduced various criteria to qualify for an exemption of up to $10 million on capital gains on the transfer of a qualifying business to an EOT, however considerations will need to be made in determining whether AMT applies, an alternative method to calculate the income tax owed in Canada. Strategic planning is therefore essential to avoid any surprises.

Succession and continuity planning for family businesses goes beyond tax and legal considerations; broader conversations about roles, responsibilities, leadership, ownership, communication, decision making and conflict management can help facilitate transitions.

Looking ahead

As the tax landscape continues to evolve in Canada, KPMG Private Enterprise professionals can help you and your business navigate these changes by providing insights into new developments, as well as the challenges and opportunities.

For more details on the tax measures announced, contact us.

About the KPMG Business Survey - Federal Budget 2024 Edition

KPMG in Canada surveyed 534 Canadian companies between February 3 and February 27, 2024, using Sago's Methodify online research platform. All respondents are business owners or executive-level decision makers. Thirty-one per cent are leaders of companies with $500 million to $1 billion in annual gross revenue; 14 per cent, between $300 million to $499 million; 35 per cent, between $100 million and $299 million; 19 per cent, between $99 million to $10 million and the remaining one per cent, below $10 million. Seventy-five per cent of the companies are privately held and 25 per cent are publicly traded. Forty-two per cent are family-owned businesses.