All About Estates

Principal residence – deceased vs. estate

The over-heating of the housing market that started in 2021 is starting to slowly cool off as a result of rising interest rates. This cooling of the over-heated housing market has given rise to a potential scenario that was originally addressed by the Canada Revenue Agency (CRA) in a technical interpretation issued in January of 2009[1].

The potential scenario exists when a decedent is deemed to have disposed of their principal residence at a value in excess of the net sale price obtained thru the sale by the estate resulting in a capital loss to the estate.

An executor or executrix may assume that the estate’s capital loss on the sale of the property is not deductible[2] given that the property was the deceased’s principal residence and was classified as personal-use property (PUP)[3].

The characterization of a taxpayer’s property as a principal residence requires a determination based on the taxpayer’s specific facts during their time of ownership. When the ownership of the property is transferred to a new taxpayer, the future characterization of the property as a principal residence becomes dependent on the specific facts of the new taxpayer during the new taxpayer’s time of ownership.

In this situation, the estate and the deceased are separate and distinct taxpayers, so when the principal residence is transferred to the estate, the future characterization of the estate’s property as a principal residence is effectively reset and dependent on the facts associated with the estate’s ownership.

CRA concluded in their technical interpretation that the capital loss incurred by the estate would not be denied as long as the estate’s beneficiaries, nor any person related to the beneficiaries, did not primarily use the property for their personal use or enjoyment during the period between the deceased’s death and the sale of the property. This situation can often happen when the property remains vacant while being reconditioned for sale and put on the market subsequent to the deceased’s death.

Where an estate realizes a capital loss on the disposition of property, which is not considered PUP, that loss can be used[4] in the current taxation year, carried forward, or carried back[5] to the deceased’s final tax return. In order to carry the loss back to the deceased’s final tax return, the loss must be realized within the first taxation year of the estate and a timely election filed with CRA[6].

It is common to think of the deceased and the estate as one in the same, but this technical interpretation reminds us that the deceased and the estate are, in fact, two distinct taxpayers.  It is important for professional advisors to always remember this distinction.

 

[1] CRA technical interpretation 2008-0280751E5

[2] Subparagraph (g)(iii) of subsection 40(2) denies the loss from the disposition of personal-use property.

[3] Personal-use property as defined in section 54 includes property owned by the taxpayer that is used primarily for the personal use or enjoyment of the taxpayer or someone related to the taxpayer.  Where the taxpayer is a trust, the property would need to be used primarily for the personal use or enjoyment of a beneficiary of the trust or someone related to the beneficiary of the trust.

[4] Capital losses can only be applied against capital gains.

[5] Carrying the loss back only applies to estates that are designated as a graduated rate estate.

[6] Under subsection 164(6), the amount carried back to the final return would be the amount, if any, by which all capital losses realized by the estate exceed the amount of all capital gains realized by the estate in that taxation year.

About John Oakey
National Tax Director for Baker Tilly Canada. John has extensive experience with Canadian corporate and personal income taxes with specialization in the areas of corporate reorganizations, estate planning, succession planning and tax compliance. He also has significant experience dealing with GST/HST issues and U.S. citizen cross-border tax reporting issues.

3 Comments

  1. Greg Anderson

    September 27, 2022 - 1:08 pm
    Reply

    And if it increased in value after the date of death, there would be a taxable capital gain?

  2. Jen Moore

    September 27, 2022 - 1:17 pm
    Reply

    Thank you for that info! Would John be able to comment on the capital loss of a (formerly) Principal Residence if it took more than a year to sell the home after the date of death and the selling price was lower than the valuation on the date of death. In the case I am thinking of, probate took almost 8 months due to COVID processing delays, and when it was finally issued, the real estate market had changed significantly, and the home was finally sold 15 months after the date of death at a loss compared to the appraised value at the time of death. I presume that the loss cannot be carried back to the final T1 Return if it cannot be used to offset other capital gains realized by the estate. (The home was not occupied during the post-death period).

  3. Clifford Goldlist

    September 27, 2022 - 1:49 pm
    Reply

    In Greg Anderson’s example, yes there would be a taxable capital gain.
    In Jen Moore’s scenario, the estate’s capital loss on the deceased’s principal residence can only be used to offset capital gains realized by the estate, because the loss is realized after the first taxation year of the estate and therefore cannot be carried back to the terminal return.

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