The section 44.1 small business rollover after Budget 2026

Budget 2026 proposes to extend the s. 44.1 replacement window from the year of sale and the following year to the year of sale plus three calendar years. A SAFE-style agreement signed within that window adds two more years, for up to five. The change applies to sales on or after January 1, 2027. It defers the gain; it does not exempt it.

Rollover vs. the $15M CGI exemption

Budget 2026 lists two measures under the “Canada Growth Incentive” banner. They work very differently:

How s. 44.1 works today

Under Income Tax Act s. 44.1, an individual can defer the capital gain on a qualifying disposition of eligible small business corporation (ESBC) shares, to the extent the proceeds are used to buy replacement shares in other ESBCs. The 2026 amendments (S.C. 2026, c. 3) raised the issuer asset ceiling from $50 million to $100 million and, according to Finance’s August 2025 explanatory notes, apply to dispositions on or after January 1, 2025. For those dispositions:

• Who: an individual, other than a trust.
• The shares sold: ESBC shares issued from treasury to you, when the combined carrying value of the issuer’s and related corporations’ assets was no more than $100,000,000 immediately before and after issuance.
• Holding period: owned by you throughout the 185 days immediately before the sale.
• Active business: throughout your ownership, the corporation was an active business corporation, meaning all or substantially all (the Budget annex describes this as “generally at least around 90 per cent”) of the fair market value of its assets was used principally in an active business, or was shares or debt of a related active business corporation.
• Canadian activity (s. 44.1(9)): the active business was carried on primarily in Canada at all times you owned the shares if that was less than 730 days, or for at least 730 days otherwise.
• Excluded issuers (s. 44.1(10)): professional corporations, specified financial institutions, and corporations where more than 50% of asset value is real property.
• Replacement shares: acquired in the year of sale or the following calendar year, and designated in your tax return for the year of sale.

What Budget 2026 proposes

For qualifying dispositions on or after January 1, 2027, the Budget annex proposes four changes:

1. A four-year replacement window. The period to acquire replacement shares “would be extended to encompass the year of disposition and the three following calendar years.”
2. A year-by-year reserve. If you don’t reinvest in the year of sale, you can either pay tax on the gain for that year or claim a reserve that defers it to the following year. The reserve is available until the replacement period ends.
3. A SAFE extension to five years. If, before the three-year window ends, you sign “an agreement with an ESBC under which the investor provides upfront capital in return for shares to be issued at a future date (e.g., a simple agreement for future equity or SAFE),” you get two more years: “a total replacement period of up to five years.” If no ESBC shares are issued to you under the agreement “by the end of the fifth year following the year of disposition, the deferred gain would be taxed.”
4. A looser ongoing asset test. The throughout-ownership asset test drops from “all or substantially all” to “primarily”, though “all or substantially all” must still be met when the shares are issued and when they are sold. The business must also be carried on primarily in Canada at issuance and for the lesser of two years and your holding period immediately afterwards.

There is one cost. For proceeds “not ultimately invested in replacement shares,” interest applies at the prescribed rate “from the balance-due day for the year of disposition to the last day of the taxation year in which the gain is taxed.” For individuals, the balance-due day is April 30 of the year after the sale. Using the full window and then not reinvesting therefore costs interest.

Replacement deadlines by year of sale

The annex expresses the windows in calendar years (“the three following calendar years”; “the end of the fifth year following the year of disposition”), so each deadline falls on December 31. Exact statutory wording will come with the draft legislation.

Worked example: $2M sale, $1.5M reinvested

An Ontario angel sells ESBC shares on March 15, 2027 for $2,000,000. The shares were held for more than 185 days and their adjusted cost base (ACB) is $200,000. By 2029 the angel has reinvested $1,500,000 in new treasury shares of two other ESBCs: $1,000,000 in Company A and $500,000 in Company B.

The 2027 sale falls under the proposed rules, so the angel has until December 31, 2030 to acquire replacement shares, and can claim a reserve year by year in the meantime. If part of the money goes into a SAFE signed by December 31, 2030, that SAFE has until December 31, 2032 to convert into ESBC shares. If the angel had used the reserve to defer the gain on the $500,000 that was never reinvested, prescribed-rate interest would run on it from April 30, 2028, the balance-due day for 2027, to the end of the year that gain is finally taxed. Paying tax on that portion for 2027 avoids the interest.

Where the deferred gain goes: the ACB reduction

The rollover is a deferral because the deferred gain is subtracted from the cost base of the replacement shares, pro rata to their cost. Under s. 44.1(2), each replacement share’s ACB is reduced by the permitted deferral × (that share’s cost ÷ total cost of all replacement shares). In the worked example:

When Company A or B shares are later sold, the deferred $1,350,000 is recognized as part of that sale’s gain, unless that sale is itself rolled over.

Open questions