If the death of the settlor of an alter ego trust, or the death of the survivor of spouses for a joint spousal trust occurred on July 31, that would trigger the realization of accrued capital gains pursuant to s. 104(4)(a) and (under s. 104(13.4)(a)) a year end and the commencement of a subsequent taxation year ending on December 31. A capital loss realized in that August 1 to December 31 taxation year would be known when filing both years’ returns (each due on the 90th day of the following calendar year by virtue of s. 104(13.4)(c)). CRA stated:
Despite the fact that the capital loss incurred in the taxation year ending December 31 is known at the time of filing the T3 return for the taxation year ending July 31, the application of such loss cannot be “reported” on the T3 return filed for the taxation year ending July 31. This can only be done by filing a T3A form, Request for Loss Carryback by a Trust.
However, CRA went on to state, regarding the situation where both T3 returns are filed together, on March 31, and the net capital loss for the taxation year ending December 31 equals the taxable capital gain realized in the taxation year ending July 31:
The loss carryback requested on the form T3A will not be processed concurrently with the T3 return for the taxation year ending July 31, as the loss must first be recognized by the CRA before it can be applied to any earlier taxation years in accordance with paragraph 111(1)(b). Therefore, the initial notice of assessment for the taxation year ending July 31 would not reflect the application of the loss carryback. Where the balance of tax is not paid on or before March 31, the assessment would include interest. When the loss carryback request is processed, the loss is applied using the request date of March 31.
For the taxation year ending July 31, the application of paragraph 104(13.4)(c) to subparagraph (a)(ii) of the definition “balance-due day” in subsection 248(1) postpones that day until 90 days after the end of the calendar year in which the taxation year ends, or March 31.
Therefore, in the example, the loss carryback is applied on the balance-due day for the taxation year ending July 31, and the net effect will be that there is no tax payable under Part I on the balance-due day of March 31. Accordingly, the interest which appeared on the notice of assessment will be reversed on the notice of reassessment for the taxation year ending July 31.