21 December 2006 Internal T.I. 2006-0216261I7 - Carryback of a capital loss

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: Paragraph 104(4)(b) and subsection 104(5) applied in 2004. In 2006, the trust realized a capital loss from the disposition of a capital property purchased after 2004. Can that capital loss be carried back to 2004?

Position: A trust can use the net capital loss to reduce the trust's taxable capital gains in any of the three preceding years or in any future year. To apply the net capital losses from other years, the capital gains realized by the trust must form part of the trust's taxable income (and not of the beneficiaries' taxable income). The conditions to carry back a capital loss could be met by a trust even if the capital loss results from the disposition of a capital property purchased after the deemed disposition date.

Reasons: Provisions of the Act

								December 21, 2006

	Joanne Vesty					HEADQUARTERS
	Calgary Tax Service Office			Income Tax Rulings
	Taxpayer Services	  				Directorate
	220 - 4th Avenue S.W.				Sylvie Labarre, CA
	720 Harry Hays Building				(613)957-8953
	Calgary AB  T2G 0L1
								2006-021626

Loss carryback to year with deemed realization income

We are writing in response to your electronic message of November 29, 2006 in which you requested our views on the possibility to carry back a capital loss incurred by a trust to the taxation year in which the 21-year deemed disposition rule applies. In your particular situation, the deemed realization occurred in 2004 and the capital loss results from the sale in 2006 of a property purchased after 2004.

Our comments

For the purposes of this memorandum, we assume that the trust owned only capital property and depreciable property in 2004.

Pursuant to subsections 104(4) and 104(5) of the Income Tax Act (the "Act"), the trust is deemed to have disposed, inter alia, of its capital property (other than exempt property and certain excluded property) including the depreciable property of a prescribed class for proceeds of disposition equal to the fair market value at the end of the deemed disposition day (which day is in the 2004 taxation year in your particular situation).

When a capital property or a depreciable property is deemed to be disposed of, the general rules of computation of income resulting from the disposition of a capital property or a depreciable property apply. A capital gain may result from the disposition of a capital property if its deemed proceeds of disposition is greater than its adjusted cost base. A capital gain and recapture of capital cost allowance may result from the disposition of a depreciable property.

The taxable capital gains from the deemed disposition of the capital property and the depreciable property are indicated on Line 25 and 30 of Form 1055. Line 32 of Form 1055 represents the amount of taxable capital gains to which the trust's net capital losses of other years can be applied. Line 33 of Form 1055 will show the recapture of capital cost allowance from the deemed disposition of depreciable property. The fact that the amount shown on line 11 of the T3 return (line to which the amount of line 42 of Form 1055 is reported) includes income of different nature resulting from the deemed disposition does not change the fact that the trust realized taxable capital gains to which net capital losses of other years can be applied. A trust can use the net capital loss to reduce the trust's taxable capital gains in any of the three preceding years or in any future year. To apply the net capital losses from other years, the capital gains realized by the trust must form part of the trust's taxable income (and not of the beneficiaries' taxable income). Form T3A, Request for Loss Carryback by a Trust must be used to carry an unused loss back to a previous year. In your particular situation, the conditions to carry back a capital loss could be met by a trust even if the capital loss results from the disposition of a capital property purchased after the deemed disposition date.

We trust that our comments will be of assistance.

Yours truly

Alain Godin
Section Manager
For Division Director
International and Trusts Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch