Principal Issues: In order to reduce the delays in refunding capital losses subject to an election under subsection 164(6), would the CRA allow the legal representative of a deceased taxpayer to claim a capital loss subject to a 164(6) election in the deceased’s final return without filing an amended return?
Position: According to paragraph 164(6)(e), the legal representative of a deceased taxpayer shall file an amended final return to give effect to the subsection 164(6) election. Although there is nothing in the Income Tax Act that preclude an amended final T1 return to be filed before the estate T3 return is filed, the CRA administrative policy is that the estate T3 return must be assessed before the reassessment giving effect to a subsection 164(6) election be processed. Administrative relief in this regard would require further consideration and consultation with various areas in the CRA. In any cases, it would be highly unusual for the CRA to allow the application of a loss before the source return has been assessed.
Reasons: The law and current administrative procedures.
FEDERAL TAX ROUNDTABLE OCTOBER 7, 2020
APFF CONFERENCE 2020
4. Election to defer loss of an estate
A deceased individual realized a capital gain in the year of death and the individual’s estate realized a capital loss in its first taxation year following the individual's death. Subsection 164(6) allows the capital loss of a graduated rate estate ("GRE") to be carried back to the deceased's final income tax return ("T1 Final Return"). The usual procedure is to prepare the T1 Final Return without the capital loss and request an adjustment to that return to include the capital loss when the GRE’s Trust Income Tax and Information Return ("T3 Return") is filed and assessed.
Since a GRE can choose its taxation year end, the first taxation year of the GRE may be less than 12 months. In addition, depending on the date of death, the deceased's T1 Final Return may have to be filed at the same time as the GRE’s T3 Return. For example, in the event of a death on February 1, 2020, the T1 Final Return for the 2020 taxation year will be due by April 30, 2021. If the GRE chooses January 31, 2021 as its taxation year end, the deceased's T1 Final Return and the GRE’s T3 Return for its taxation year covering the period from February 2, 2020 to January 31, 2021 would normally be filed at the same time.
Despite the CRA's current service standards, in practice, practitioners are finding that delays in processing requests for adjustments to a T1 Final Return are becoming increasingly long. In some cases, these delays can exceed one year. In the case where a loss realized by an estate is carried back to the deceased's T1 Final Return pursuant to the subsection 164(6) election, processing times of up to two years have been observed.
The 2019 version of the T3 Trust Guide states:
“If you know you want to apply a loss to the deceased person’s final T1 return before that return is due to be filed, you can submit a request to apply the loss with the return. Clearly identify the return as a 164(6) election. Although we will not allow the claim on the initial assessment of the T1 return, we will hold your request until we assess the T3 return and verify your claim. If we accept your claim, we will adjust the T1 return, and issue a notice of reassessment.” (our emphasis)
However, at the 2019 APFF Conference Roundtable on Provincial Taxation, Revenu Québec made a favourable statement to the effect that it is possible to claim the capital loss that is subject to the election directly on the deceased's final TP-1 return, without a requirement to proceed with an adjustment, since the capital loss is already known at the time the two tax returns are filed.
Question to the CRA
Is the CRA considering applying the same flexibility as Revenu Québec regarding the subsection 164(6) election, i.e., not having to go through an adjustment to the T1 Final Return to claim a capital loss, in light of the long administrative delays?
CRA Response
To give effect to the rules in the Income Tax Act that apply to the disposition of property of a deceased taxpayer by legal representatives, it is necessary to file an amended T1 Final Return in the name of the deceased taxpayer for the taxation year in which the taxpayer died. It is not possible to file a T1 Final Return and include the deduction under paragraph 164(6)(c) or 164(6)(d) without requesting an amendment to the original T1 Final Return. Paragraph 164(6)(e) clearly states that the legal representative is required to file an amended Final T1 Return at or before the time prescribed for filing the election referred to in paragraphs 164(6)(c) and 164(6)(d).
While there is no provision in the Income Tax Act that prevents the taxpayer's amended T1 Final Return (including the election under paragraphs 164(6)(c) and 164(6)(d)) from being filed before the T3 Return is filed, it is the CRA's administrative practice to assess the T3 Return before the reassessment giving effect to the election can be processed. That practice ensures that the loss claimed and any resulting reduction in tax payable or refund is substantiated.
Relaxing CRA's procedures and any administrative policy in that regard would require a thorough review of the issue and consultation with several areas of the CRA. That said, it would be highly unusual for the CRA to allow a loss to be applied to a tax return before the return giving rise to the loss has been assessed.
Guylaine Gladu
(343) 542-8592
October 7, 2020
2020-085216
Response prepared in collaboration with:
Marc Grignon, Stakeholder Relations Division, Individual Returns Directorate
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