Principal Issues: Where a trust late-files a subsection 104(13.1) or (13.2) designation in conjunction with a loss carry back from a subsequent year, can the beneficiary's return be amended for that prior year to remove the previously included income or capital gain?
Position: Yes, subject to the requirements noted below.
Reasons: Filing procedure provided below.
STEP CRA Roundtable – June 10 2016
Question 5. Capital Loss Carryback and Late Filed Subsection 104(13.2) Designation
For 2016 and subsequent years, where income and capital gains of a trust are actually paid out or made payable, a designation under subsection 104(13.1) or subsection 104(13.2) is not permitted pursuant to subsection 104(13.3), unless the taxable income of the trust is nil.
At the 2015 STEP CRA Roundtable, we queried whether a carry back of a capital loss realized in a subsequent year would allow a late subsection 104(13.2) designation to be filed. CRA noted that a late-filed subsection 104(13.2) designation would generally be acceptable provided that taxable income for the year was not greater than nil.
The 104(13.2) designation will include in the income of the trust a capital gain realized for that previous year that was allocated out to the beneficiary. The beneficiary’s tax return would then be amended to remove the capital gain. Is this permissible?
CRA Response
The trust can make a late subsection 104(13.1) or (13.2) designation as long as the application of the loss results in nil taxable income for the trust. Filings to amend the tax position of the trust and the beneficiary are as follows:
- The trust would file Form T3A “Request for a Loss Carryback by a Trust” in connection with the loss year to request the loss be carried back to the prior year.
- The trust would file Form T3-ADJ “T3 Adjustment Request” for the prior year to reflect a late subsection 104(13.1) or (13.2) designation so as to amend the trust’s T3 Return.
- The trust would issue amended T3 slips to the beneficiary for that prior year, reducing the income allocated.
- The beneficiaries would file a Form T1-ADJ “T1 Adjustment Request” to reflect the revised T3 slip and to amend the T1 Return.
The CRA will only reassess beneficiaries’ returns if the tax years to which they relate and the tax year of the trust to which the loss will be applied are not statute-barred.
The trust must file Forms T3A and T3-ADJ together as they must be processed concurrently.
John Bogdan
2016-063490