Does the definition of “non-capital loss” found in s. 111(8), read with s. 111(2), allow a taxpayer to deduct the full amount of unused net capital losses in the year of death or the immediately preceding year, thereby generating a non-capital loss available to be carried back to a previous taxation year? CRA responded:
if, in the year of death, a taxpayer has a net capital loss or any unused net capital losses carried forward from prior years, the special rules in subsection 111(2) concerning the application of paragraphs 111(1)(b) and 111(1.1)(b), as they are to be read under these circumstances, allow the deduction of such losses (less the amount of any capital gains exemption claimed by the taxpayer …) up to the amount of the taxpayer’s available income from all sources for the year of death and the immediately preceding year.
The modification provided in subsection 111(2) in the year of death clearly indicates the parameters within which unused net capital losses can be applied against all sources of income (i.e., Parliament intended for this concession to apply only in the year of death and the immediately preceding year). Accordingly, if there is a balance of unused net capital losses remaining after applying the unused net capital losses against all sources of income in the year of death and immediately preceding year, it is our view that such unused net capital losses are not transformed into a non-capital loss that can be carried back to another taxation year other than as described above.