In these turbulent economic times we have seen asset values go up and down…well, mostly down. These fluctuations in value can be problematic particularly in a estate situation where tax has been paid by the deceased on capital gains made on the deemed disposition of assets on death.

A person is deemed to have disposed of their capital assets immediately before death for proceeds of disposition equal to the fair market value of those assets unless the assets have been transferred to a surviving spouse or a spousal trust. Similarly, a person is deemed to have received the fair market value of the assets in their registered plans immediately before death. In both cases, the person’s estate is considered to have received the deceased’s assets with a tax cost equal to deceased’s deemed proceeds of disposition. Should those assets go down in value then the estate will sustain a capital loss on the sale of the assets. Given that the deceased and the estate are different taxpayers the estate’s capital loss is not automatically applied to the deceased’s capital gain.

If the capital loss is sustained within the first year anniversary of death the trustee(s) may elect in prescribed form to apply the capital loss to the deceased’s terminal return thus reducing the capital gain tax paid on death. Similarly, where the value of assets held in a registered plan have gone down in value prior to distribution within the first year anniversary of death the loss may be applied to the deceased’s terminal return.

Remember to include language in the will to allow your trustee(s) the ability to make tax elections and turn a bad loss into a good tax recovery.

Enjoy…Derek de Gannes.