Using Capital Losses on a Deceased Person's Final Return in Canada

If the person who died had net capital losses, those losses may be more valuable on the final return than they would have been in any other year. The rules for the year of death are more generous than the usual ones.

This page walks through how those losses can be used, the special election for estate losses, and the limits to watch for. Your own figures and the details of the estate can change the outcome, so a lawyer or accountant should confirm the numbers.

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

The usual rule and the year-of-death change

Net capital losses are normally used against capital gains. For a deceased person, the CRA says 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.

The Income Tax Act supports this by changing the net capital loss rule for the year of death: unused net capital losses for all taxation years that are not otherwise claimed may be deducted in computing taxable income, rather than only the usual carry-forward.

Net capital losses of other years are claimed on line 25300 of the final return.

Losses created by the death itself

A deemed sale at death can produce a loss as well as a gain. The deceased is treated as having sold property just before death, and the result is fair market value on the date of death minus adjusted cost base, reported on Schedule 3 and line 12700.

This means that the value you place on each asset affects the size of any gain or loss. Keep records that support the fair market value of each asset at the date of death.

Moving estate losses back to the final return

Sometimes the estate sells property after death at a loss. Gains on property the estate sells after death are reported on the estate's T3 return, not on the final return.

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 must be made 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 of a loss can be moved, depend on the facts, so get advice before electing.

Limits and interactions to watch

• Spousal rollover: where property of a taxpayer resident in Canada immediately before death passes to a spouse or common-law partner resident in Canada, the deceased is deemed to dispose of it at the adjusted cost base (or, for depreciable property, the lesser of capital cost and cost amount), so no gain or loss arises on that property. This applies only if the property vests indefeasibly in the spouse or a qualifying trust within 36 months after death, or a longer period the Minister allows on written application.
• Non-resident spouse: the rollover does not apply to a spouse or common-law partner who was not resident in Canada immediately before death, and the ordinary deemed disposition applies instead.
• Opting out: the representative may elect, property by property, that the rollover not apply. Proceeds are then set at fair market value, which can help use the deceased's losses, the capital gains deduction, or lower rates on the final return.
• Capital gains deduction: gains on qualified small business corporation shares or qualified farm or fishing property may be eligible for the lifetime capital gains deduction, claimed on line 25400 using Form T657.
• Principal residence: a gain on the deceased's home may be fully or partly exempt, but it must still be reported on Schedule 3, and the designation covers only years up to the date of death. Which form to use for the designation depends on your situation, so it is worth confirming with a lawyer.

Because these choices interact, using losses to absorb other income may not give the result you want. How this applies depends on your situation, so it is worth asking an accountant to model the final return with and without an election.

What to do next

• Collect prior returns and notices of assessment to confirm the net capital losses available.
• Prepare Schedule 3 with the date-of-death value and cost of each asset.
• Check whether any property is passing to a spouse or common-law partner, and whether to elect out of the rollover.
• Track sales made by the estate after death and whether it may be a graduated rate estate.
• Note the filing deadline, which depends on the date of death and on whether a business was carried on.
• Ask a lawyer or accountant to confirm how much loss can be used and in which year.

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

Frequently asked questions