CRA agrees that it will not apply ss. 40(3.61) and (3.6), and 164(6), iteratively to eliminate a s. 164(6) loss carryback where the estate also realized a small capital gain

In the first taxation year of an estate, it realizes a capital loss of $1,000,000 on redeeming a portion of the common shares of a private company held by it, which it wishes to carry back under s. 164(6) to offset a portion of the capital gains realized in the deceased’s terminal return. However, in the same taxation year, the estate realizes $30,000 of capital gains on disposing of portfolio securities. Under an approach suggested by CRA in 2012, the $30,000 of capital gains would grind the capital loss available for purposes of the s. 164(6) election. The grind effected by the interaction of ss. 40(3.61) and (3.6) and the netting of the estate’s capital gains and capital losses in s. 164(6)(a), would continue to occur in an iterative manner, so that the estate’s $1 million capital loss would for s. 164(6) purposes would be reduced to nil.

CRA has withdrawn this earlier view, and now considers that the s. 164(6) election should be applied first to the amount of the capital loss determined without regard to the s. 40(3.4) or 40(3.6) stop-loss rules, and that such rules apply only to any capital loss of the estate that is not the subject of the s. 164(6) election. In the example, s. 164(6)(a) limits the elected amount to the net capital losses of $970,000, so that such elected amount is deemed to be a capital loss in the deceased’s terminal return which is preserved by the s. 40(3.61) relieving rule - whereas $30,000 of the estate’s capital loss remains in the estate so as to be subject to the s. 40(3.6) stop loss rule (such that the estate is taxed on $30,000 of capital gains).

Neal Armstrong. Summary of 26 November 2020 STEP Roundtable, Q.5 under s. 40(3.61).