As the old saying goes ‘there’s two things inevitable in life: death and taxes’. Sadly, for most of us they will happen in the same year. We’re not going to get into all of the issues surrounding a deceased taxpayer (there are many); we’re just going to concentrate on capital losses. You have a capital loss when you sell, or are considered to have sold, a capital property for less than its adjusted cost base plus the outlays and expenses involved in selling the property.
In the year of death, many items are considered ‘deemed disposition’. Canada Revenue Agency (CRA) is basically saying that you sold them at the time of death. Capital losses may have also occurred, or the deceased may have capital losses from prior years that were unused. These capital losses, usually, can only be written off against capital gains. In the year of death, if there is any capital losses left over after using them against capital gains, the balance can be used against other income.
CRA allows for two methods to apply a net capital loss that happened in the year of death, you could use either Method A or Method B.
You can carry back a 2014 net capital loss to reduce any taxable capital gains in any of the three tax years before the year of death. If you are applying it against taxable capital gains realized in 2011, 2012, or 2013, you do not need to make any adjustment because the inclusion rate is the same in all three years. The loss you carry back cannot be more than the taxable capital gains in those years. To ask for a loss carryback, complete “Section III − Net capital loss for carryback” on Form T1A, Request for Loss Carryback, and send it to your tax centre. Do not file an amended return for the year to which you want to apply the loss.
After you carry back the loss, there may be an amount left. You may be able to use some of the remaining amount to reduce other income on the final return, the return for the year before the year of death, or both returns. However, before you do this, you have to calculate the amount you can use. From the net capital loss you have left, subtract any capital gains deductions the deceased has claimed to date. Use any loss left to reduce other income for the year of death, the year before the year of death, or for both years.
If you claim any remaining net capital loss in the year of death, you should claim it as a negative amount in brackets at line 127 of the final return.
Do not use a capital loss claimed against other income at Line 127 in the calculation of net income for the purposes of calculating other amounts such as social benefit repayments, provincial or territorial tax credits, and those non-refundable tax credits requiring the use of net income.
You can choose not to carry back the net capital loss to reduce taxable capital gains from earlier years. You may prefer to reduce other income on the final return, the return for the year before the year of death, or both returns. However, before you do this, you have to calculate the amount you can use.
From the net capital loss, subtract any capital gains deductions the deceased has claimed to date. Use any loss remaining to reduce other income for the year of death, the year before the year of death, or for both years.
If you claim any remaining net capital loss in the year of death, you should claim it as a negative amount in brackets at Line 127 of the final return.
A man died on June 20, 2014. You have the following details about his tax matters:
He did not claim any capital gains deductions for 2011 or 2012.
You can use Method A or Method B.
If you choose Method A, you can use the net capital losses to reduce his 2012 taxable capital gains to zero ($11,000 − $4,000). Then, you can use the remaining balance of $7,000 to reduce his 2011 taxable capital gain to zero ($7,000 − $2,000).
After you subtract his capital gains deductions ($5,000 − $4,000), you still have $1,000 left to reduce the man’s other income for 2014 or 2013 or for both years.
If you choose to use this method, you will first deduct his capital gains deductions of $4,000 from his net capital loss in 2014 of $11,000. You can now use the remaining $7,000 to reduce the man’s other income for 2014 or 2013, or for both years.
If you claim any remaining net capital loss in the year before the year of death, you will need to complete Form T1-ADJ, T1 Adjustment Request, or send CRA a signed letter providing the details of your request. Send your Form T1-ADJ or letter separately from the deceased’s final return. Applying a 2014 net capital loss to a previous year may reduce any capital gains deductions the deceased claimed in that year or a following year.
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