Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.
Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the Department.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle du ministère.
Principal Issues: Whether an estate can retroactively change the period for which its accounts were made up, so as to take advantage of ss.164(6).
Position: No.
Reasons: Ss. 164(4) does not contemplate retroactive changes. Requests to change year-end are TSO responsibility -- follow IT-149R. Not a "fairness" issue.
2000-002357
XXXXXXXXXX J.D. Brooks
(613) 957-2103
Attention: XXXXXXXXXX
May 23, 2000
Dear Sirs:
Re: Capital Losses Realized by an Estate
This is in reply to your letter of April 26, 2000 which was addressed to our Belleville Tax Services Office and copied to the Income Tax Rulings Directorate as well as to the Honourable Lyle Vanclief and the Minister of National Revenue. You requested us to consider a certain tax consequence facing a particular estate that is a client of yours, which consequence you perceive to be unfair.
We have not received an authorization from your client that you are authorized to represent the estate and thus the confidentiality provisions of the Income Tax Act (the "Act") prevent us from discussing the estate's income tax matters with you. Nevertheless, we make the following general comments which address the issue you raised. We have generalized your query as the following hypothetical scenario:
An individual died in the autumn of calendar year 1. By virtue of subsection 70(5) of the Act, the individual was deemed to have, immediately before death, disposed of each capital property and received proceeds of disposition equal to its fair market value. This caused the individual to realize a capital gain of $10,000, resulting in a taxable capital gain of $7,500. The executor of the individual's estate chose to have a December 31 year-end. In the summer of calendar year 2, the estate disposed of its capital properties and realized a capital loss of $4,000, resulting in an allowable capital loss of $3,000. At issue is whether the $3,000 allowable capital loss of the estate can be applied to partially offset the taxable capital gain reported by the individual in the terminal return.
While trusts are generally required by paragraph 249(1)(b) of the Act to have a taxation year that ends on December 31, paragraph 104(23)(a) of the Act permits an estate to effectively choose any date for its first year-end, provided that the taxation year is not more than 12 months long. In any particular situation, there may be valid reasons for selecting a year-end of December 31. The tax consequences depend on whatever date is chosen.
Where a capital loss arises on the disposition of property by the estate in its first taxation year, subsection 164(6) of the Act permits the legal representative of the estate (the executor, in this case) to elect to have the loss be deemed to be a capital loss of the deceased person in that person's last taxation year rather than a loss of the estate. In the above hypothetical example wherein the legal representative had chosen December 31 as the estate's year-end, if the estate had realized a capital loss from the disposition of property prior to December 31 of calendar year one (i.e. its first taxation year), such an election could have been made. However, losses incurred in the estate's second taxation year would not be eligible for this election.
Once a year-end is chosen, paragraph 104(23)(a) of the Act requires subsequent taxation years to use the same year-end unless the Minister concurs with a requested year-end change. This provision does not contemplate retroactive changes. Where a change in fiscal period is at issue, Interpretation Bulletin IT-179R (Change of Fiscal Period) describes the procedure for requesting such a change. It states that each request is considered on its own merits, taking into consideration sound business reasons. It also states that the saving or deferment of income taxes is not accepted as a sound business reason. Furthermore, normally a retroactive change will not be approved. A request for a change in the fiscal period of an estate is the responsibility of the Tax Services Offices. However, an estate in a fact situation similar to that of the hypothetical scenario described above should not anticipate receiving a favourable response to a request to retroactively change its taxation year.
Section 220 of the Act permits the Canada Customs and Revenue Agency (CCRA) to administer the tax system more fairly. For instance, subsection 220(3.2) deals with requests to revoke a taxpayer's election. With respect to the application of this fairness provision, the CCRA has an Information Circular 92-1 (Guidelines for Accepting Late, Amended or Revoked Elections) which states guidelines that are to be followed on considering requested changes to elections. As in the case of considering requests for fiscal year-end changes, the Circular states that each request will be considered on its own particular merits. It also states at paragraph 11 that a request will not be accepted in the following instances:
(a) It is reasonable to conclude that the taxpayer made the request for retroactive tax planning purposes. This could include taking advantage of changes to the law enacted after the due date of the election.
(b) Adequate records do not exist to verify whether or not the request can be accepted.
(c) It is reasonable to conclude that the taxpayer had to make the request because he or she was negligent or careless in complying with the law.
Since the selection of an estate's period for which its accounts are made up is not an election, the fairness provisions described here are not relevant; nevertheless, they are described here to demonstrate that the fairness considerations are similar to the considerations for a fiscal year-end change.
We trust that we have clarified the issues.
Yours truly,
T. Murphy
Manager
Trusts Section
Resources, Partnerships and Trusts Division
Income Tax Rulings Directorate
Policy and Legislation Branch
c.c. Belleville TSO
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