In my previous blog, Principal residence – deceased vs. estate, I discussed the opportunity for an estate to claim a capital loss on a property that was previously the principal residence of the deceased and carry it back to the deceased’s final tax return under subsection 164(6) of the Income Tax Act (ITA).
A number of readers reached out to me regarding the difficulties of realizing the loss and filing an election within the legislative timeframe. Difficulties could be related to: delayed probate, uncooperative beneficiaries, changing market conditions, inexperienced administrators, etc. Today’s blog will provide specific information regarding this legislative timeframe.
Graduated rate estate
Only a graduated rate estate (GRE) can utilize subsection 164(6) of the ITA to carry the capital loss back to the deceased’s final tax return.
A GRE is defined, in subsection 248(1) of the ITA, as the estate that arises on and as a consequence of an individual’s death if, at the relevant time:
- The estate is a testamentary trust,
- The estate has not been in existence for more than 36 months after the individual’s death,
- The deceased individual’s Social Insurance Number is provided in the current and all past income tax returns of the estate,
- The estate was designated as the deceased’s GRE in the estate’s tax return for its first taxation year, and
- No other estate is designated as the GRE for the deceased for any year.
Assuming that the estate is a GRE, then there are two specific legislative dates to consider when contemplating carrying back a capital loss under subsection 164(6) of the ITA:
- Date of the transaction that triggers the loss
- Due date for filing the elect
1. Date of the transaction that triggers the loss
The disposition of capital or depreciable property under paragraphs (a) or (b) of subsection 164(6) of the ITA must occur within the first taxation year of the GRE. Many people assume that this taxation year is 12 months from the date of the individual’s death. In fact, the taxation year of a GRE, as defined in subsections 249(1) and (5) of the ITA, is the period for which the accounts of the estate are made up for purposes of assessment under the ITA – not exceeding 12 months.
This wording provides flexibility to the administrator of the GRE to pick any date to represent the end of the first taxation year as long as the number of months in the first taxation year does not exceed 12. If the end of the first taxation year chosen results in a taxation year of less than 12 months, then the disposition of the capital or depreciable property must occur within this shorter time frame. For example, if an individual dies on November 30th and the administrator chooses a December 31st taxation year, then the timeframe to complete the disposition of capital or depreciable property must happen within the 31 days of this first taxation year.
Any disposition that falls outside of the first taxation year of the GRE will not be eligible for the loss carry-back under subsection 164(6) of the ITA regardless of the reasoning.
2. Due date for filing the election
Paragraphs (c), (d) and (e) of subsection 164(6) of the ITA require the filing of an election and amended return of income for the deceased individual within the prescribed time in regulation 1000(2) of the ITA, which is the later of:
- the due date of the GRE’s first tax return, and
- the due date of the individual’s final tax return.
Therefore, the election and amended return can be filed with CRA after the taxation year as long as it is filed before the due date. Subsections 220(3) and (3.2) of the ITA legislatively provide CRA with the discretion to accept a late-filed election and amended return. CRA’s administrative policies regarding acceptance of late-filed elections are contained in Information Circular IC07-1R1 Taxpayer Relief Provisions.
Time is of the essence
The timing of the disposition of capital or depreciable property is crucial as subsection 164(6) of the ITA does not provide CRA discretion to accept an election for a loss realized outside the first taxation year. On the other hand, CRA does have discretion to accept a late-filed election and an amended return, but it is highly recommended that these filings are submitted in a timely fashion to avoid potential disappointment and penalties.
 Regulation 600 of the ITA includes late-filed elections under subsection 164(6) of the ITA.