2023-0961311C6 STEP 2023 - Question 2 – Worthless Property

Principal Issues: On administering an estate, the executors discover share certificates of public corporations that have become worthless (now bankrupt). A review of tax returns of the deceased reveals that capital losses were never claimed on these assets. In 2012, at the STEP Canada / CRA Roundtable, CRA stated that a net capital loss might be available provided the capital loss of a particular year exceeded capital gains of that year and a request is made within 10 years. What is the basis for the 10-year time period? In this still CRA’s position and what information would be required to support the claim?

Position: Yes, the CRA's position has not changed.

Reasons: Any unused net capital loss can be carried forward and applied against taxable capital gains in a taxation year that is open for reassessment. If a particular taxation is not open for reassessment, subsection 152(4.2) provides the Minister with the discretion to reassess a taxpayer that is an individual (other than a trust) or a graduated rate estate after the normal reassessment period (as defined in subsection 152(3.1)) in order to give the taxpayer a refund or to reduce Part I taxes payable. Subsection 152(4.2) of the Act permits the Minister to adjust an individual's income tax return after the normal reassessment period in respect of a taxation year if an application for an adjustment is made by the individual within ten calendar years after the end of that taxation year. Therefore, a net capital loss may be applied to a particular taxation year that is not open for reassessment if the request to amend the income tax return of the particular year to take into consideration the net capital loss is made within 10 calendar years after the end of the particular taxation year.

Author: Clarkson, Julia
Section: 152(4.2), (1.1), 111(8)

2023 CRA STEP Roundtable – June 20, 2023
Question 2. Worthless Property

On administering an estate, the executors discover share certificates of public corporations that have become worthless (now bankrupt). A review of tax returns of the deceased reveals that capital losses were never claimed on these assets.

In 2012, at the CRA STEP Roundtable, (footnote 1) CRA stated that a net capital loss might be available provided the capital loss of a particular year exceeded capital gains of that year and a request is made within 10 years.

What is the basis for the 10-year time period?

Is this still CRA’s position and what information would be required to support the claim?

CRA Response

As noted in our response for question 7 at the 2012 CRA STEP Roundtable, a capital loss may be incurred at the time of a disposition (or deemed disposition) of a capital property.

In general terms, subsection 111(8) of the Act (footnote 2) defines a net capital loss for a taxation year as being the excess of allowable capital losses incurred during a taxation year over taxable capital gains realized in that same taxation year. A net capital loss exists independently of whether or not it is reported in the tax return for the taxation year when it was incurred. As provided for by paragraph 111(1)(b), any unused net capital loss balance can be carried back to the three preceding taxation years or carried forward indefinitely until it has generally been applied completely against taxable capital gains in a taxation year that is open for reassessment.

Subsection 152(4.2) provides the Minister with the discretion to reassess the return of income of a taxpayer that is an individual (other than a trust) or a graduated rate estate after the normal reassessment period (as defined in subsection 152(3.1)) of a taxation year has expired in order to give the taxpayer a refund or to reduce Part I taxes payable. An application to request that the Minister exercise this discretion to amend an income tax return for a particular taxation year must be made in writing on or before the day that is 10 calendar years after the end of that particular taxation year. This relief is generally provided when the Minister is satisfied that the request for the adjustment would have been processed if it had been made within the normal reassessment period.

In the situation where a legal representative of the deceased discovers that an allowable capital loss was incurred in a particular taxation year that is not open for reassessment because its normal reassessment period has expired, relief may be available if no Notice of Determination under subsection 152(1.1) or (1.11) was issued with respect to the net capital loss of the particular taxation year. (footnote 3) Such relief will depend on whether there are taxable capital gains realized in the year of the loss.

If the taxpayer realized taxable capital gains in the particular taxation year in which the allowable capital loss was incurred, the deceased’s representative may make a written application for relief under subsection 152(4.2) for the refund or reduction of Part I tax payable that would result from the deduction of the allowable capital loss against those taxable capital gains. However, that application must be made on or before the day that is 10 calendar years after the end of the particular taxation year.

If the allowable capital loss exceeds the taxable capital gains for the particular taxation year (or there were no taxable capital gains in the year), the excess amount constitutes a net capital loss that may be carried forward indefinitely. Subsection 152(4.2) requests can be made by the legal representative of the taxpayer, as discussed above, to apply the net capital loss amount to a taxation year that is not open for reassessment, provided that the request is made within 10 calendar years of the end of the year in which the net capital loss carryover would be applied.

After receiving any available relief, any unapplied net capital loss amount could be deducted against taxable capital gains realized in a taxation year that can be assessed through either the return of income filed for the taxation year, or a request to amend such a return.

For clarification, we provide the following example.

Assume that an individual taxpayer dies in 2023. The taxpayer’s legal representative discovers that the taxpayer incurred a capital loss of $20,000 (with an inclusion rate of 50%) in 2008. The taxpayer’s income tax return for the 2008 taxation year reports $3,500 of taxable capital gains, but does not report any allowable capital losses. The taxpayer also reported taxable capital gains in other taxation years as follows:

2011 $3,000

2015 $7,000

2016 $4,000

The allowable capital loss in 2008 is $10,000 ($20,000 x 50%), and the net capital loss available to carry over to other taxation years is $6,500 ($10,000 allowable capital loss less $3,500 taxable capital gains).

In 2023, the legal representative submits a written application under subsection 152(4.2) to request a refund of Part I taxes paid from the application of the net capital loss to taxation years before the taxpayer’s death.

Subsection 152(4.2) provides the Minister with the discretion to provide such relief for taxation years not open to reassessment that end in the period 2013 to 2023.

As the 2008 taxation year does not fall within the 10-year limitation period of subsection 152(4.2), no reduction of Part I taxes can be assessed to recognize the $3,500 of allowable capital loss effectively applied in that taxation year due to the definition of net capital loss in subsection 111(8).

Similarly, as the 2011 taxation year does not fall within the 10-year limitation period of subsection 152(4.2), no reduction of Part I taxes can be assessed to recognize an application of the net capital loss carryover in that taxation year.

The Minister does have the discretion to allow a reassessment of the 2015 taxation year to provide a reduction of Part I taxes payable for the year as a result of applying the $6,500 net capital loss carryover against the $7,000 of taxable capital gains realized in the year.

Julia Clarkson
2023-096131

FOOTNOTES

Note to reader: Because of our system requirements, the footnotes contained in the original document are shown below instead:

1 See the response for question 7, CRA document 2012-0442961C6.

2 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.

3 As stated in subsection 152(1.3), a Notice of Determination that has been issued under subsection 152(1.1) or (1.11) “is (subject to the taxpayer's rights of objection and appeal in respect of the determination and to any redetermination by the Minister) binding on both the Minister and the taxpayer for the purpose of calculating the income, taxable income or taxable income earned in Canada of, tax or other amount payable by, or amount refundable to, the taxpayer, as the case may be, for any taxation year.”

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