Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA. Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.
Principal Issues: STEP has asked whether CRA is prepared to recommend relieving amendments to subsection 164(6) and to work with Department of Finance on such amendments.
Position: CRA would be pleased to work with Department of Finance should it seeks our assistance.
Reasons: This issue of whether subsection 164(6) should be amended involves tax policy considerations which are the purview of the Department of Finance.
Author: Kohnen, Phil
Section: 164(6); 220(3.2) and Reg 600(b)
2020 STEP CRA Roundtable – November 26, 2020
QUESTION 15 – Subsection 164(6) limitations
The conditions to be eligible to utilize the double tax relieving provisions of subsection 164(6) are very restrictive. For example, there must be a disposition that occurs within the first taxation year of the graduated rate estate. Because of these strict requirements, practitioners have for years been concerned – and experienced the results of such concerns – that many estates may not be eligible for such planning because of the tight timelines and requirements for an actual disposition.
Would the CRA be prepared to recommend and work with the Department of Finance to offer affected taxpayers more relieving conditions to utilize subsection 164(6)? For example, perhaps an expanded 3 year limitation could be introduced along with an elective disposition rather than an actual disposition?
Subsection 164(6) of the Income Tax Act (the “Act”) allows the legal representative that is administering the graduated rate estate (“GRE”) of a deceased taxpayer to elect to have certain capital losses and terminal losses deemed to be losses of the deceased for the taxpayer’s year of death (and not of the GRE). The election, which results in the carry back of the elected amount to the final return of the deceased, can be useful in addressing potential double taxation concerns which may arise on death.
The election must be made in prescribed manner and within a prescribed time, as set out in section 1000 of the Income Tax Regulations (the “Regulations”). However, pursuant to paragraph 600(b) of the Regulations, subsection 164(6) is a prescribed provision for purposes of paragraphs 220(3.2)(a) and (b) of the Act. Accordingly, CRA has the authority to accept a late filed subsection 164(6) election, should it agree to do so. It should be noted that this does not change the requirement that the losses to which this election applies must have been incurred in the first taxation year of the estate.
We note that concerns regarding subsection 164(6) were raised with the Department of Finance (“Finance”) in the October 2, 2017 submission of the Joint Committee on Taxation of the Canadian Bar Association and Chartered Professional Accountants of Canada. The submission raised several reasons in support of its belief that post-mortem planning using the provision may not be practical.
The submission noted the requirement that the election be made within the first taxation year of the estate following death, and suggested that this did not provide sufficient time to decide and implement the necessary steps to realize the capital loss, so that the election can be made, citing reasons such as matters as family grieving, complicated estate administration, or pending or potential litigation.
It also raised a concern that the estate may not be able to require the shares to be fully redeemed within one taxation year, citing as potential reasons the terms of the shares, related shareholder agreements, or cooperation from other shareholders.
The submission suggested that subsection 164(6) be modified to (i) extend the time limit for making the election to the end of the third taxation year of the estate and (ii) allow the election to be made in respect of an "elective disposition" as well as actual dispositions.
In regard to your question posed, we would like to remind you that the CRA is responsible for administering and enforcing the Act and the Regulations as enacted by Parliament. Any proposed changes to tax policy or amendments to legislation, such as that suggested in the Joint Committee submission, are the purview of the Tax Policy Branch at Finance.
Accordingly, CRA is prepared to work with Finance should they seek our views on this issue.
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