Some taxpayers claiming the lifetime capital gains exemption (LCGE) for capital gains on or after June 25 are having their tax returns assessed incorrectly, tax practitioners say.
The LCGE, available for gains on the sale of small business shares and farming and fishing property, increased to $1.25 million from $1,016,846, effective June 25, 2024 — the date the now-defunct proposed increase to the capital gains inclusion rate was originally slated to take effect. (The CRA is administering the increased LCGE, although the measure still requires legislation.)
In an email, Ryan Minor, director of tax with CPA Canada, said “several” of the organization’s members raised concerns that “individuals are being assessed incorrectly” when the LCGE is claimed for dispositions on or after June 25. For example, an assessment based on a lower LCGE limit than claimed may be the result of a calculation that doesn’t include inflation adjustments. The CRA hasn’t confirmed the cause of the incorrect assessments, Minor said.
“We are seeking advice from the CRA as to what individuals in this situation should do,” he said in the email. “We are hoping that the CRA will proactively reassess taxpayers in this situation,” without the taxpayer having to file an objection or T1 adjustment request.
T1 taxpayers with capital gains to report (including capital gains on T3 tax slips) have until June 2 to file their returns — an extension announced on Jan. 31 when the Finance Department deferred the proposed increase to the capital gains inclusion rate, which the Liberals have now dropped. (These T1 taxpayers’ spouses generally didn’t get the filing extension, although the CRA previously told CPA Canada that spouses are eligible for the extension when it comes to any forms and elections, including T1135s, normally included with T1 returns.)
In addition to incorrect assessments related to the LCGE, tax practitioners this tax-filing season dealt with missing tax slips or duplicate tax slips showing up in CRA portals, following changes to the electronic filing system for slips.
Also, T1 and T3 schedules maintained the reporting of capital gains before and after June 25 of last year in line with the proposed increase to the capital gains inclusion rate, which has been a complicating factor this season.
In an emailed response on Friday to an earlier query about resolving the tax-filing issues, including the LCGE issue, the CRA didn’t directly reference the LCGE. However, the agency said it “made significant progress in returning to regular processing timelines” for the validation of tax slips. “Processing occurs in stages, and some tax slips may still be pending as we work through inventories — this is expected each filing season,” CRA spokesperson Nina Ioussoupova said in the email.
On its website, the Canadian Federation of Independent Business (CFIB) describes the LCGE as a tool to help many small business owners save for retirement or invest in another small business. “Most entrepreneurs don’t have pensions and rely on the ultimate sale of their business, together with the protection of the LCGE, as their retirement plan,” it says.
In an interview, CFIB president and CEO Dan Kelly said the organization sent a letter to Prime Minister Carney, asking for legislative action on “unfinished business” from the Trudeau government. “We want that legislation passed,” he said of the LCGE.
While Carney has said his government will proceed with the increased LCGE, he’s been silent on the proposed Canadian Entrepreneurs’ Incentive (CEI), Kelly noted. Referring to the CEI, “it’s not a perfect measure, and I think it needs some further fixes,” he said. “But it is a good measure, and we are advising governments to proceed with that.”
The proposed CEI would reduce the inclusion rate to one-third on a lifetime maximum of $2 million in eligible capital gains when an entrepreneur sells their business. The lifetime limit would be phased in at $200,000 per year, beginning on Jan. 1, 2025, before reaching $2 million in 2034.
Regarding the dropped proposal to increase the capital gains inclusion rate, Kelly said that “there’s no question” some business owners made disposition decisions based on the proposal. “About 4% of our members said they triggered the sale of their business through shares,” he said, and about 6% sold investments held corporately. Those who sold the business may have “moved faster than they would otherwise have,” Kelly said.
The CFIB has also asked for legislation to formally eliminate the carbon tax, ensuring the small business carbon tax rebates are delivered tax-free and returning the remaining $500 million in 2024–25 carbon tax rebates to small businesses.