Principal Issues: Does subsection 46(1) of the Act apply to property of an estate that was personal-use property of a deceased taxpayer but is not personal-use property of the estate.
Position: No. The estate's adjusted cost base of the property will continue to be determined by paragraph 70(5)(b) of the Act.
Reasons: Subsection 46(1) of the Act applies only to personal-use property.
2023 STEP CRA Roundtable – June 20, 2023
QUESTION 1. Personal Use Property
Personal use property (“PUP”) is property held primarily for the personal use or enjoyment of an individual.
An individual dies with various personal possessions (e.g., furniture, artwork of nominal value, etc.) that are PUP to the individual, and the individual paid less than $1,000 for each property. Per paragraph 46(1)(a), the minimum adjusted cost base of an item of PUP is $1,000. Assume post death none of this PUP is used by a beneficiary for personal use or enjoyment. (For example, it is moved into storage and later sold to an auction house).
Assume these properties fetch less than $1,000 per item.
In this case, can the estate claim capital losses when the properties are sold by the estate?
CRA Response
Personal-use property is defined in section 54 of the Act.i Generally speaking, it is a property owned by a taxpayer that is used primarily for the personal use or enjoyment of the taxpayer or a person related to the taxpayer. On a disposition of PUP, subsection 46(1) deems the adjusted cost base (“ACB”) to be the greater of $1,000 and the amount otherwise determined. It also deems the proceeds of disposition to be the greater of $1,000 and the amount otherwise determined. Subparagraph 40(2)(g)(iii) contains a special rule that deems any capital loss from the disposition of PUP to be nil.
As stated at the 2011 CRA STEP Roundtableii, a deceased person and their estate are distinct taxpayers. Therefore, the determination of whether a property owned by an estate is PUP must be made on its own facts and merits. Accordingly, if a property was not used by the beneficiaries of the estate or persons related to them during the period following the death and before its sale, the property would not meet the definition of PUP.
Where paragraph 70(5)(a) of the Act applies to a property, paragraph 70(5)(b) applies to any person who acquires the property as a consequence of the death a taxpayer. The property is deemed to have been acquired at the time of death at a cost equal to its fair market value (“FMV”) immediately before the death. In the case at hand, if the personal possessions are PUP of the estate, subsection 46(1) could apply to modify the estate’s ACB and proceeds of disposition for the purposes of computing any capital gain or loss on a disposition of the property. However, if the personal possessions are not PUP of the estate, subsection 46(1) will have no application. Therefore, paragraph 70(5)(b) will continue to apply to the estate and its ACB of the personal possessions will be their FMV immediately before the death.
If the personal possessions are not PUP of the estate, a capital loss realized on the sale of the property by the estate would not be deemed to be nil pursuant to subparagraph 40(2)(g)(iii) of the Act. Accordingly, provided the property is not acquired by a person affiliated with the estate, a capital loss realized on the sale of the personal possessions by the estate would be deductible against capital gains of the estate.
Matthew Ross
2023-096134
FOOTNOTES
Note to reader: Because of our system requirements, the footnotes contained in the original document are shown below instead:
1 The Act means the Income Tax Act R.S.C. 1985 (5th Supp.) c.1 as amended from time to time and consolidated to the date of this response and, unless otherwise expressly stated, every statutory reference herein is a reference to the relevant provision of the Act.
2 See 2011-0401871C6.