All About Estates

Death of a Beneficiary – Alter Ego and Joint Spousal Trusts

At a recent tax conference, the Canada Revenue Agency (CRA) shared its view on reporting a post-mortem loss incurred by a trust in the first year following the death of the last life interest beneficiary (the settlor in the case of an alter ego trust, and the last to die of the spouses in the case of a joint spousal trust.

Both an alter ego trust and a joint spousal trust are deemed to have disposed of the property of the trust at the date of death with the tax on the resulting capital gain due by the trust’s balance-due date. The next tax year of the trust will then be from the date of death to December 31 of the year in which the death occurred. Say the death occurred on July 31, there will be a tax year of the trust for January 1 to July 31 and a subsequent tax year for August 1 to December 31. Both returns are due 90 days after the calendar year in which the death occurred.

Our tax rules provide that a capital loss incurred in the 3 tax years following death may be applied against the capital gain in the trust’s tax year which includes the date of death by filing a prescribed form. Let’s say the capital loss occurs in the first tax year after death and is known at the time of filing both tax return for the calendar year in which the death occurred. Since the loss will be known at the time of filing both tax returns, would the CRA allow the capital loss to be reported on the tax return filed for the date of death rather than requiring the filing of a loss carryback request?

The CRA said “no” – the capital loss in the first tax year after death cannot be reported on the return for the tax year which includes the date of death. This can only be done by filing a separate loss carryback request.

This serves as a reminder to trustees to follow the steps thus ensuring the maximum tax relief. Happy New Year and thanks for reading.

About Derek de Gannes
Derek A. de Gannes: Senior Director, Private Client Services of RSM Canada. RSM Canada is committed to the highest level of integrity, quality and professionalism and provides clients with solutions in the area of Audit, Tax and Transaction Services. Email: derek.degannes@rsmcanada.com

0 Comments

Leave a Reply

Your email address will not be published. Required fields are marked *