Question: I understand that capital losses within an estate are transferable to beneficiaries of that estate. In my case, my mother who died in 2008 had capital loses. As a beneficiary of her estate, can I apply my portion of those losses to my 2008 income tax return to offset any capital gains I have?
If a deceased taxpayer had unused capital losses at the time of death and (or) losses realized from the deemed disposition at death, these capital losses may be used to offset capital gains from the current year and the year prior to death. If any excess losses remain, these may then be applied to any income of the year of death and the year immediately preceding the death. Any excess capital losses the still remain after application to those two years cannot be used to reduce income from other tax years nor be transferred to the deceased.
If the deceased has a surviving spouse, the property can be rolled over tax deferred to the surviving spouse. If excess losses still remain, the it may be advisable to realize the gains before transferring to the surviving spouse in order to use the losses.
Following death and while the estate is being settled, the property of the deceased is treated as a trust for tax purposes. The property is deemed to have been acquired at its fair market value at the time if death and any gains or losses on subsequent disposition are taxable in the trust. Losses incurred by this trust may be carried back to the deceased’s’ income in the year of death only. Typically losses cannot be “transferred” to a beneficiary of a trust since losses inside the trust must be used gains (applied back three years or forward until the disposition of the trust to the capital beneficiaries). When you receive your inheritance you are normally considered to be a capital beneficiary. If you receive the “property” from the trust, then you receive it at its adjusted cost base and on subsequent sale can realize the loss.
If the estate has liquidated all assets and only have cash, used all capital gains effectively but still has an excess, paid all taxes and received clearance from the CRA, then it may pay out the inheritance.
The losses cannot be transferred to the beneficiaries of the estate.
However, if the estate transfers the property with “accrued losses” to the beneficiaries, then the transfer is at the value as at the date of death and the losses ca be realized directly.
Losses and estate are very complicated matters. Anyone administering an estate where there were losses carried forward, losses realized on death, or losses realized or accrued following death should seek professional advice.
Follow-Up Question: Thank you for your detailed reply. In looking for clarity, I do notice a statement which I think directly applies to my case, and I would appreciate your reaction to my interpretation. Understand we are interested in capital losses post death date. Your second to last paragraph below contains the following statement.
“However, if the estate transfers the property with “accrued losses”
to the beneficiaries, then the transfer is at the value as at the date of death and the losses ca be realized directly.”
In my case the death of my mother was July, 2008. I interpret that the non-registered investment assets which had a total value at date of death being higher than today’s value result in a current capital loss which is the “accrued loss” referred to in your statement. I further interpret “can be directly realized” to infer that the accrued capital losses can be applied against capital gains that a beneficiary of these assets may have from other sources.
Please let me know if the above interpretations are correct, and if so what are the time limitations to apply (realize) these losses?
I’ll give you a scenario that should help aid you understanding.
A taxpayer dies owning shares of XYZ with a market value of $10,000 and a cost of $9,000. Six months later the estate still holds the shares of XYZ and is ready to distribute the shares to the beneficiaries. However, the value of the shares is now only $7,500.
Assuming there were no other gains or losses, here are the consequences:
1. As of the date of death, the deceased has a deemed sale of the shares for $10,000 and must report a capital gain of $1,000 of which $500 is taxable on their final “terminal” tax return.
2. Immediately after death, the estate of the deceased is deemed to have acquired the shares of XYZ at a cost of $10,000.
3. Six months following the death the shares of XYZ show a loss of $2,500. The executor may either apply this accrued loss to the $1,000 gain on the terminal return OR the executor may distribute the shares of XYZ to the beneficiaries. The beneficiaries will have been deemed to have acquired the shares at a cost of $10,000 and can then sell them for a loss which they can apply to their own gains in the current year and prior three years or carry forward indefinitely.
In the above scenario, if the executor sold the shares, then no loss is available to be transferred to the beneficiaries.
I hope this helps.