Can Capital Losses on a Final Return Offset Other Income in Canada?

When someone dies owning investments that have lost value, or after years of unused losses, the executor often asks whether those losses can be put to work. The final return has a special rule that is more generous than the one for ordinary years.

This article explains how that rule works, how estate losses can sometimes be carried back, and what to check before you file. It is general information, and the numbers in your situation call for a lawyer or accountant.

This article covers Canadian federal tax law, which applies in every province.

How losses arise on the final return

On death, the deceased is treated as having sold all capital property just before death, which can create a gain or a loss. The result is fair market value on the date of death minus adjusted cost base, reported on Schedule 3 and line 12700 of the final return. Where property is worth less than its cost, the result is a loss.

Whether your losses add up to a net capital loss depends on the figures for each property, so it is worth confirming with a lawyer or accountant. The year-of-death rules then decide where it can be used.

The special rule for the year of death

In the year of death, net capital losses on the final return and the prior year's return can offset income other than capital gains, which is not normally allowed in other years. That means they can reduce things like employment income, pension income or RRSP and RRIF income included on the final return, not just gains.

The Income Tax Act supports this by allowing unused net capital losses for all taxation years that are not otherwise claimed to be deducted in computing taxable income in the year of death, rather than only the usual carry-forward. Net capital losses of other years are claimed on line 25300 of the final return.

The exact order and limits for applying losses can be technical, so have the figures checked before filing. The details depend on the facts.

Losses the estate realizes after death

Gains on property the estate sells after death are reported on the estate's T3 return, not on the final return. How an estate can use its own losses depends on the facts, so it is worth confirming with a lawyer or accountant.

There is an exception for a graduated rate estate. If it disposes of capital property in one of its first three taxation years and its capital losses exceed its gains, the legal representative may elect to treat part of the excess as the deceased's loss on the final return. The election is due by the estate's filing due date for that year, and the final return must be amended. Whether an estate qualifies as a graduated rate estate, and how much can be moved, is worth confirming with a professional.

How losses interact with other choices

A spousal rollover normally means property is transferred at its adjusted cost base, so no gain or loss arises at death. The legal representative can elect out of that rule, property by property, so that fair market value applies, which can be useful to use the deceased's losses, the capital gains deduction, or lower rates on the final return.

The capital gains deduction for qualifying shares or farm and fishing property is claimed on line 25400 using Form T657. Because losses, the deduction and elections can affect one another, they are best planned together rather than one at a time.

• Losses and gains are measured at fair market value on the date of death, so valuation evidence matters.
• Optional returns can allow certain credits to be claimed more than once, but they are not required.
• Principal residence gains may be exempt, but the property is still reported on Schedule 3.

What to do next

For a death from January 1 to October 31, the balance owing and filing are due April 30 of the following year; for a death from November 1 to December 31, the return is due 6 months after the date of death. If the deceased, or a spouse or common-law partner living with them, carried on a business on the date of death, the filing due date is instead June 15 of the following year for deaths from January 1 to December 15, and 6 months after death for deaths from December 16 to December 31; the payment due date does not change.

A late return with a balance owing attracts a penalty of 5% of the balance plus 1% for each full month late, up to 12 months, and it can be higher if a late-filing penalty was assessed in any of the 3 previous years.

• List every capital property and its adjusted cost base and date-of-death value.
• Collect prior-year returns and notices of assessment showing unused net capital losses.
• Note any property the estate expects to sell after death.
• Ask a lawyer or accountant whether a graduated rate estate loss election applies.
• Keep valuation records for each property.

Frequently asked questions