The query noted that when an estate elects under subsection 164(6) to apply a capital loss to the terminal return of the deceased, it is possible to create "circularity" under 164(6), when the estate carries back a loss but then realizes a capital gain on other assets in its first taxation year. CRA stated:
We…agree… that it is possible for a circularity issue to arise. If the estate realizes capital gains during its first taxation year, those gains must be applied against the loss on the share disposition, in accordance with the requirements of subsection 164(6), in order to determine the amount that can be carried back. Where this occurs, the application of 40(3.61) will result in an amount of loss stopped pursuant to subsection 40(3.6), which in turn will reduce the amount available for the 164(6) election, and the circular nature of these provisions becomes an issue….
We suspect that the incidence of this potential circularity issue is likely quite limited….