25 February 2004 External T.I. 2004-0056681E5 - 164(6) losses and prior tax yrs

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.

Principal Issues: Where the net capital loss for the year of death includes capital losses arising from the year of death and from the application of subsection 164[6], can the deemed capital losses arising from the application of subsection 164(6) be applied against the taxable capital gains incurred in the year of death such that the capital losses incurred in the year of death can be applied against income in other years?

Position: No.

Reasons: A capital loss incurred in a taxation year cannot be applied against the income of any other year; where the amount of allowable capital losses exceed the taxable capital gains realized in a particular taxation year, the resulting excess will form a net capital loss for the year as determined under subsection 111(8), which in the case of the year of death can be applied against income of any kind in the year of death or preceding year because of the operation of 111(2). Although an election under subsection 164(6) may increase the net capital loss or non-capital loss for the year of death by reason of the increase in the capital losses which are deemed to have occurred in the year of death, paragraph 164(6)(f) prevents the application of any such increase in the net capital loss or non-capital loss to any previous year. However, the increase in the net capital loss can be applied against other income earned in the year of death.

XXXXXXXXXX 	2004-005668
		Annemarie Humenuk
Attention:  XXXXXXXXXX 

February 25, 2004

Dear XXXXXXXXXX:

Re: The Limitation under Paragraph 164(6)(f) on the Application of Losses

This is in reply to your letters of March 20, and October 24, 2003, in which you ask for clarification of the limitation imposed by paragraph 164(6)(f) on the application of capital losses to a deceased taxpayer's income tax returns. We apologize for the delay in our response.

All statutory references in this letter are references to the provisions of the Income Tax Act, R.S.C. 1985 (5th supp.) c. 1, as amended (the "Act").

While paragraph 164(6)(f) clearly prohibits the amount of any capital loss that is the subject of an election under subsection 164(6) from being applied to reduce the deceased taxpayer's income for any year prior to the year of death, you ask whether it is possible to substitute such capital losses for capital losses otherwise realized by the deceased taxpayer in the year of death which have previously been used to offset capital gains realized in that year such that the other capital losses can be applied to the previous taxation years.

Historically, the manner in which a deceased taxpayer's tax payable for the year of death was reduced as a result of an election under subsection 164(6) was that the deceased taxpayer's legal representative was considered to have paid an amount on account of the deceased taxpayer's tax payable for the year of death equal to the reduction in tax that would have occurred if the losses subject to the election had been realized by the deceased taxpayer rather than by the estate. As noted in the Department of Finance Technical Notes to the 1985 proposed amendments, the 1986 amendment was consequential on the introduction of the capital gains exemption. The amendment was required because the notional application of additional capital losses to the final return of a deceased taxpayer would also affect the computation of various amounts defined in subsection 110.6(1) that are used in the computation of a capital gains deduction. Paragraph 164(6)(f) ensures that any increase in the deceased taxpayer's non-capital or net capital loss for the year of death as a result of an election under subsection 164(6) cannot be applied to any other taxation year.

There is no provision in the Act to deduct capital losses realized in one taxation year in any other taxation year; instead, when the amount of a taxpayer's capital losses for a particular taxation year exceeds the amount of the taxpayer's capital gains for that year, the taxpayer's net capital loss for that taxation year as defined in subsection 111(8) is normally available to be applied to other taxation years to the extent provided by paragraph 111(1)(b).

When the total of the capital losses that are the subject of an election under subsection 164(6) and capital losses otherwise realized by the deceased taxpayer in the year of death exceed the amount of capital gains realized by the deceased taxpayer in that year, paragraph 164(6)(f) limits the application of the resulting net capital loss to any other taxation year to the extent that the amount of the net capital loss can be considered to be in respect of the capital losses that were the subject of the election under subsection 164(6). As a result, the amount of the net capital loss for the year of death that can be applied to any other taxation year is limited to the net capital loss as computed without reference to the capital losses that are the subject of the election under subsection 164(6). In the example provided in your letter, no amount of the revised net capital loss for the year of death would be available to be applied against any other taxation year. However, the full amount of the revised net capital loss is available to be applied against other income of the deceased taxpayer in the year of death by reason of the modified rules of application in subsection 111(2).

We trust our comments have clarified our position in this matter.

T. Murphy
Section Manager
for Division Director
International & Trusts Division
Income Tax Rulings Directorate
Policy and Planning Branch