On the death of the taxpayer, he realized a $4.9 million capital gain under s. 70(5) on his common shares of PrivateCo. Capital gains were also realized on his investment portfolio both prior to the date of death - and between the date of death and December 31 of $30,000. A portion of the common shares of PrivateCo are redeemed, resulting in a capital loss of $1 million in the estate. Applying the approach advanced in 2012-0449801C6 and 2012-0462941C6, the $30,000 of capital gains realized by the estate in its first taxation year 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 ultimately be reduced to nil. Does CRA agree?
CRA responded:
The CRA has reconsidered its earlier view and notes that an iterative grind of the estate’s capital loss would yield a result which is contrary to the purpose of the relief provided by subsection 40(3.61). … The CRA is [now] of the view that pursuant to subsection 40(3.61):
- the subsection 164(6) election applies first, and the capital loss available for the election is determined without reference to subsection 40(3.4) or 40(3.6), and
- the stop loss rules in subsections 40(3.4) or 40(3.6) apply to any capital loss of the estate that is not the subject of the subsection 164(6) election.
… Paragraph 164(6)(a) limits the amount of the election to the net amount of the estate’s capital losses and capital gains, or $970,000. Assuming the legal representative elects on this amount, the $970,000 amount will be deemed to be a capital loss of the deceased taxpayer for the deceased taxpayer’s last taxation year (terminal T1 return) and $30,000 of the estate’s capital loss will remain in the estate. Accordingly, the relieving measure in subsection 40(3.61) preserves the estate’s capital loss that can be applied to the deceased taxpayer’s terminal T1 return. Subsection 40(3.6) would apply to …the remaining capital loss of $30,000 [which] would be deemed to be nil.
In summary, the estate would be taxed on its $30,000 of capital gains because the capital loss that remains in the estate after the election is nil and, in accordance with paragraph 40(3.6)(b), would be added to the adjusted cost base of the common shares of PrivateCo held by the estate after the disposition. A similar result would occur where the estate makes the subsection 164(6) election for an amount that is less than the result of the paragraph 164(6)(a) calculation (for example, if the estate elected for less than $970,000).
… [T]he relief provided by subsection 40(3.61) is only in respect of a disposition of a share … .