11 June 2012 STEP Roundtable Q. 7, 2012-0442961C6

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: Will the CRA allow a capital loss for worthless securities to be claimed by the deceased in the tax return for the year of death or is it possible for the statute barred taxation year to be re-opened for the purpose of carrying back the loss?

Position: It depends on when the loss was incurred.

Reasons: The legislation makes it quite clear what the timeframe is to make a reassessment.

STEP CRA ROUNDTABLE June 2012

Question 7

In handling the affairs of deceased taxpayers, it is not uncommon to find certificates of stocks, bonds, and other securities in a drawer or a safety deposit box. Very often such securities are old and may also be worthless. On the basis that the deceased had not previously deducted an amount for the loss on such securities, and assuming that the loss arose in a year preceding the date of death and that the taxation year is statute-barred, will the CRA allow a capital loss for the worthless securities to be claimed by the deceased in the tax return for the year of death or is it possible for the statute barred taxation year to be re-opened for the purpose of claiming the loss?

CRA Response

For the purposes of the question, we assume that any losses are capital losses.

Generally, subsection 70(5) provides that a taxpayer is deemed to have disposed of each of the taxpayer`s capital properties immediately before his or her death for proceeds of disposition equal to the fair market value of the property at that time. Any person who acquires the property as a consequence of the taxpayer's death is deemed to have acquired that property at a cost equal to those proceeds. Therefore, in a situation where securities are worthless at the time of the taxpayer`s death, the taxpayer is deemed to have disposed of those securities for proceeds equal to their fair market value at that time. Any resulting capital loss may be included in the taxpayer's final return.

On the other hand, where there was a disposition of securities prior to the taxpayer's death (for example, the deceased owned shares in a corporation that was dissolved), the capital loss was incurred at the time of the disposition.

In general, subsection 111(8) defines a net capital loss for a taxation year as being the excess of allowable capital losses over taxable capital gains. A net capital loss exists independently of whether or not it is reported in the tax return for the taxation year when it was incurred. Any unused net capital loss can be carried forward to a year that is not statute barred.

Where the deceased realized taxable capital gains in the year the allowable capital loss was incurred, the deceased's representative may ask the CRA to apply the allowable capital loss to reduce the taxable capital gains so long as the request is made on or before the day that is ten calendar years after the end of that taxation year pursuant to subsection 152(4.2). It should be noted that, even if the CRA cannot reassess the year of the allowable capital losses to apply the losses against taxable capital gains of that year, only the excess of the allowable capital losses over taxable capital gains constitutes the net capital loss that may be carried forward. In other words, part of the losses would not be available to be claimed.

Katharine Skulski
June 11-12, 2012
2012-044296