All About Estates

Alter Ego and Joint Partner Trusts – Loss Utilization

Alter ego trusts (“AET”s)  and joint partner trusts (“JPT”s) have a deemed year end on the date of death of the last life interest beneficiary (the settlor for an AET and the last to die of the spouses for a JPT) resulting in the deemed disposition of certain property of the trust as at this date. The tax on the resulting capital gain is due on the trust’s balance due day. The next taxation year of the trust will be from the day after the date of death to December 31 of that year. In other words, there will be two trust year ends in the year the death occurred, with both tax returns due 90 days after that calendar year.

If a loss is subsequently realized by the trust in the 3 taxation years following death, the loss can be carried back (by filing a Form T3A – Request for a Loss Carryback) to be claimed against the capital gain realized by the trust in the taxation year which includes the date of death.

At the Fall 2020 STEP Roundtable, the CRA was asked about the manner in which this loss carryback may be claimed in circumstances where it is known by the time the two returns for the taxation year in which the death occurred (noted above) are to be filed. In particular, the CRA was asked whether the capital loss realized during the period following the date of death to December 31 could be claimed on the tax return filed for the date of death, as opposed to reporting the gain on the date of death return and then filing a T3A on the second return, on the theory that both returns are filed at the same time and the amount of the loss and its application can be verified by the CRA.

Unfortunately, the CRA indicated that taxpayers will need to continue to use the T3A approach, based on the technical provisions of the Income Tax Act. Despite the fact that the amount of the capital loss is known at the time of filing the first return, the capital loss can not be reported on the first return because it has not actually been realized prior to the year end of the date of death return. While this is perhaps not the answer taxpayers were hoping for, the CRA did note that, once the capital loss is carried back and applied, any interest that was payable as a result of not paying the tax owing on the return for the year of death (presumably on the theory that the tax will be eliminated once the loss is applied), will be reversed.

About Maureen Berry
Maureen Berry is a partner in the Trusts, Wills, Estates and Charities group at Fasken. Maureen’s practice is focused on wills, estate planning, domestic and international trusts, private corporation taxation, and executive compensation. Maureen also advises charities and non-profit organizations. Working with Canadian and international families, firms, corporations and charitable organizations, she provides advice on all aspects of private client matters. She is a leading expert in the fields of tax law and estate planning. As an Adjunct Professor at Osgoode Hall Law School, she teaches Advanced Estate Planning. Maureen has previously taught corporate tax and international tax at the University of Toronto and Western University, along with the Bar Admission course for up-and-coming lawyers.

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