CRA indicates that there can be no interest ultimately payable to the extent that a life interest trust realizes a capital loss in the stub period following death

Life interest trusts, such as alter ego trusts and joint spousal trusts, are deemed under s. 104(4)(a) to have a deemed year end on the date of the death of the last life interest beneficiary and to have disposed of certain property on the date of death. However, if there is a loss in the first taxation year after death, this loss will be reported on the tax return filed for that year and carried back to offset or reduce the gain for the year ending with the death.

However, CRA noted that s. 104(13.4)(c), which postpones the balance due date for the first deemed taxation year to March 31 (or March 30 for a leap year), can provide relief. Suppose that a capital loss sustained in the second taxation year ending on December 31 equals or exceeds the capital gain realized in the first taxation year ending on, say, July 31. By filing the two tax returns, and the loss-carryback request before the balance due-date of March 31, once the first taxation year has been reassessed to recognize the loss for the second taxation year, the effect should be that no Part I tax is payable, and the Part I tax that was initially assessed on the first taxation year should be reversed.

Neal Armstrong. Summary of 3 December 2019 CTF Roundtable, Q.15 under s. 104(13.4)(c)(i).