Budget 2026: the small business investment rollover, more time to reinvest
Under the Income Tax Act today, an individual can defer tax on a capital gain from selling shares of an eligible small business corporation (ESBC). The deferral applies to the extent the sale proceeds go into replacement shares of another ESBC. Budget 2026 (tabled November 5, 2026) gives investors more time to do that.
This post sets out the rule as it stands, what Budget 2026 changes, and one illustrative timeline. It describes the rules only.
Key takeaways
- The rule today gives the year of the sale and the following calendar year to buy replacement ESBC shares.
- Budget 2026 extends that period to the year of the sale and the three following calendar years.
- If the proceeds are not reinvested in the sale year, Budget 2026 lets the individual pay tax that year or claim a reserve, which defers the gain to the following year, until the period ends.
- An investor who signs an agreement for future equity, such as a SAFE, before that period ends gets two more years, up to five in total. If no ESBC shares are issued by the end of the fifth year after the year of the sale, the deferred gain is taxed.
- Budget 2026 sets January 1, 2027 as the start date: it covers qualifying sales on or after that day.
The rule today
The rule covers an individual who sells eligible small business corporation (ESBC) shares. The gain is deferred to the extent the proceeds buy replacement ESBC shares in the year of the sale or the following calendar year.
For a sale to qualify, the Budget 2026 tax annex lists three conditions:
- Holding period: the individual held the shares for at least 185 days immediately before the sale.
- Active business: throughout the time the individual owned the shares, the corporation was a taxable Canadian corporation. All or substantially all of its assets, measured by fair market value, were used principally in an active business. The assets could also be shares or debts of a related active business corporation. The annex says “all or substantially all” generally means at least around 90 per cent.
- Canadian activity: the active business was carried on primarily in Canada for the lesser of two years and the period the individual held the share.
What Budget 2026 changes
A longer replacement period
Budget 2026 extends the period to buy replacement shares. It covers the year of the sale and the three following calendar years.
A reserve for the years without a purchase
Say an individual makes a qualifying sale in a year and does not reinvest the proceeds that year. Budget 2026 lets that person choose between two paths. One is to pay tax on the capital gain for the year of the sale. The other is to claim a reserve, which defers recognition of the gain to the following year. This deferral mechanism is available until the end of the replacement period.
Two more years with a SAFE
The annex also covers agreements for future equity. In one, an investor provides upfront capital in return for shares issued at a later date. A simple agreement for future equity, or SAFE, is the annex’s example.
Budget 2026 adds a special provision here. Say an individual signs such an agreement with an ESBC before the three-year replacement period ends. That person can defer the capital gain for two more years. The total replacement period is then up to five years.
If no shares are issued
If no ESBC shares are issued under the agreement by the end of the fifth year following the year of the sale, the deferred gain is taxed.
Budget 2026 also adds an interest charge. It applies to any proceeds that are not ultimately invested in replacement shares. Interest runs at a prescribed rate. It starts on the balance-due day for the year of the sale. It ends on the last day of the taxation year in which the gain is taxed.
Changes to the eligibility tests
Budget 2026 also changes two of the three conditions above. Neither change is to the 185-day holding period.
First, the asset test for the time of ownership. Budget 2026 lowers the threshold from “all or substantially all” to “primarily”. This applies throughout the period the individual owned the shares. The “all or substantially all” threshold still has to be met at the time the shares are issued and at the time they are sold.
Second, the Canadian activity test. The active business must be carried on primarily in Canada when the shares are issued. It must stay that way for a continuous period right after the issue. That period is the lesser of two years and the period the individual owned the shares.
Before and after
| Item | The rule today | Budget 2026 |
|---|---|---|
| Replacement period | Year of the sale and the following calendar year | Year of the sale and the three following calendar years |
| Replacement period with an agreement for future equity | Year of the sale and the following calendar year | Up to five following calendar years, if the agreement is signed before the three-year period ends |
| Asset test while the shares are owned | All or substantially all | Primarily; the stricter test still applies at issue and sale |
| Canadian activity | Primarily in Canada for the lesser of two years and the holding period | Primarily in Canada at issue and for a continuous period after, the lesser of two years and the ownership period |
An illustrative timeline
This example is illustrative. It uses only the rules in the annex.
Priya, a Chilliwack business owner, buys shares of an ESBC on November 20, 2026. She sells them on June 15, 2027. That is 207 days of ownership, above the 185-day minimum. The sale falls on or after January 1, 2027, so Budget 2026 covers it. She does not reinvest the proceeds in 2027, so she either pays tax on the gain for 2027 or claims a reserve.
- 2027 is the year of the sale. Under the rule today, she would have until December 31, 2028 to buy replacement ESBC shares.
- Under Budget 2026, the period covers 2027 and the three following calendar years. It ends December 31, 2030.
- On September 10, 2029, she signs a SAFE with a different ESBC. That is before December 31, 2030, so the two extra years apply. Her total period now ends December 31, 2032.
- If ESBC shares are issued to her under the SAFE by December 31, 2032, they arrive within the period. If none are issued by then, the deferred gain is taxed.
The example leaves dollar amounts out. This post does not work out how much gain is deferred.
When it applies
Budget 2026 sets January 1, 2027 as the start date. These measures cover qualifying sales that occur on or after that day. For the wider picture of what Budget 2026 means for owners in BC, read our Budget 2026 summary. A separate measure, the capital gains exemption, is covered in who qualifies for the $15 million exemption.
Questions about Budget 2026 and your business? Talk to us or call 778-779-4212.
Source: Budget 2026, Tax Measures: Supplementary Information. Figures are from the Budget 2026 tax annex at budget.canada.ca.
General information only. Talk to us about your situation.