Error on Treatment of Capital Gains on Final Tax Returns

A computer "glitchî has materialized at Canada Revenue Agency with the processing of T1 returns of deceased taxpayers. In short, assessments are being processed without taking ITA S. 111(2) into consideration regarding capital losses and capital loss carry forwards.

In years other than the year of death, capital losses may only be deducted against capital gains in the year, the prior three years, or subsequent years. In the year of death, S.111 (2) allows capital losses from the current year and capital losses carried forward from previous years to be applied to reduce any type of income. There are two methods permitted.

For Method A, the capital losses must be used in this order:

• Capital losses applied to reduce capital gains in the year of death
• Remaining capital losses applied against capital gains in the 3 years prior to death
• Reduce any remaining unapplied losses by the amount of capital gains deductions claimed in prior years
• Apply any remaining loss against other income in the year of death or immediately preceding year.

For Method B:

• First deduct capital gains deductions claimed in prior years.
• The remaining capital losses may be used to reduce income in the year of death and/or the immediately preceding year.

The assessments are currently being processed to carry-forward capital losses for use in future years of the deceased taxpayer. Tax and Financial Advisors should review their client files and notify any clients that may fall into this category to review the NOA and any changes applied prior to remitting additional tax to CRA.