- Net capital losses on the final return or from the prior year can offset income other than capital gains, which is not the usual rule in other years.
- Losses on personal-use property generally cannot be claimed, but losses on listed personal property can offset gains from the same category.
- A spousal rollover or a home designation can change whether a gain or loss shows up at all, so check the property-by-property picture first.
If you are the executor, you may find that some of the deceased's investments are worth less than they paid. On death, the tax system treats the deceased as having sold their capital property, so those losses can matter on the final return.
This article explains in plain terms how capital losses are treated on death, which losses count, and where the rules change. The details turn on the specific assets, so an accountant or lawyer can confirm how they apply to your estate.
This article covers the law of British Columbia.
Why capital losses come up at death
Under the Income Tax Act, a taxpayer is deemed to have disposed of each capital property immediately before death for proceeds equal to its fair market value at that time. The CRA describes this as the deceased being considered to have sold everything just before death, even though no actual sale takes place.
The gain is the fair market value less the adjusted cost base. It is reported on Schedule 3, and the taxable portion goes into income on line 12700 of the final return. If the value is below the cost, you have a loss instead of a gain.
The special rule for net capital losses
In most years, capital losses can only be used against capital gains. Death is different. Net capital losses from the final return or the prior year can offset income other than capital gains.
In practice, this means a loss on shares could reduce other income the deceased reported, such as employment or pension income. How the prior-year part is applied, and whether an adjustment to an earlier return is needed, is worth confirming with an accountant.
Which losses can be claimed
| Type of property | Treatment of a loss |
|---|---|
| Personal-use property | Generally cannot be claimed |
| Listed personal property (art, jewellery, rare books, stamps, coins) | Can offset gains from the same category |
| Cottage used for personal enjoyment | Personal-use property, so a loss cannot be claimed |
| Rental property | Reported on Schedule 3; recapture or a terminal loss is reported on Form T776 |
When the rules change
If capital property vests indefeasibly in a spouse or common-law partner resident in Canada within 36 months after death, it is deemed disposed of at adjusted cost base, so no gain or loss arises on the final return. The legal representative can elect out of the automatic spousal rollover, property by property, in the final return. That choice can be used to trigger a loss, so the decision deserves advice.
The family home is handled separately. Even if the whole gain is exempt, the home must still be designated on Schedule 3 and Form T1255 in the final return. If the home passes to a spouse or common-law partner on a rollover, the gain is reported as zero and a pre-death designation is not required.
What to do next
- List every capital asset the deceased owned at death with its value at death and its cost.
- Sort the assets into personal-use, listed personal property, rental and investment property, and the home.
- Find out which assets are going to a spouse or common-law partner and whether a rollover applies.
- Check whether the deceased had losses carried over from earlier years or a prior-year return that could be affected.
- Ask an accountant or lawyer to confirm how the loss rules apply before you file the final return.
Frequently asked questions
Can a capital loss reduce employment or pension income on the final return?
Yes, on death net capital losses from the final return or the prior year can offset income other than capital gains. This differs from other years, so confirm the calculation with an accountant.
Can I claim a loss on the deceased's cottage?
A cottage used for personal enjoyment is personal-use property, and a loss on it cannot be claimed. A rental property is treated differently and is reported on Schedule 3.
Do I still report the home if there is no tax on it?
Yes. Even if the whole gain is exempt, the home must be designated on Schedule 3 and Form T1255 in the final return. The exception is a home passing to a spouse or common-law partner on a rollover, where the gain is reported as zero and a pre-death designation is not required.
Can I choose not to use the spousal rollover?
The legal representative can elect out of the automatic spousal rollover, property by property, in the final return. Whether that makes sense depends on the gains and losses involved, so get advice first.
Sources
- Income Tax Act, s. 70 — Justice Laws (federal)
- CRA – Deemed disposition of property — canada.ca
- CRA – Capital gains (someone who died) — canada.ca
Links go to official government, court and regulator pages. The law changes — confirm you are reading the current version.
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