I am preparing a T3 Graduated Rate return with large capital losses. I have been told that capital losses can NOT be carried back to the final T1. However, my reading of section 164(6) seems to say that I can. Has anybody used this? Another wrinkle is that I am filing the T3 late. If 164(6) can be used, does the lateness void the ability to use it?
Sure you can carry losses back to the final T1, as long as it’s within the proper time frame and other requirements are met. Be prepared, though, as CRA is not really good at figuring out this election. There is an option of preparing the final T1 with the 164(6) losses applied already. This is the best way as long as you know what the estate’s net losses are when preparing the final T1.
Thanks Kevin. The guide says to report the amount to be transferred at Line 19 of the return. As a negative amount?
Date of realization of loss?
… check your dates carefully…
Also “large” losses within a small time frame may indicate valuation issues at DOD?
I’m not sure if you mean line 19 on a T1 or a T3. If I’m reporting the 164(6) loss when preparing the final tax return, I put the loss on a separate line in the appropriate section of Schedule 3. If I’m doing an adjustment to the T1 after reporting it on a T3 return, I file an election on the T3 return to carry back the loss and send that send that election with a T1-ADJ and amended Schedule 3 to CRA. I haven’t read the Guide recently so I’m not sure what the reference to line 19 is about.
Capital losses in the estate can be carried back to the final T1 under the provisions of subsection 164(6) provided those capital losses are incurred in the first taxation year of the estate.
The amount that you elect under subsection 164(6) gets entered in field 1646 of Schedule 1 of the T3 return. This carry back gets entered as a Positive Number (this is why the instructions on that line say do not put this amount in brackets).
I have done this on several occasions where a shareholder of a small business corporation died owing common shares… but the treasury subsequently redeemed the shares (deemed dividend to estate) meaning a disposal by the estate for zero proceeds but large ACB.
Entering the amount in field 1646 (line 19) of Schedule 1 of the T3 return is considered to be making the election and it is “supposed to” trigger an automatic reassessment of the T1 return. In some cases I have found the CRA will automatically do this… in most cases I have found they don’t… but YMMV.
That brings up a question I have. I understand the corporation can redeem the shares. But is it possible to redeem all the shares so that subsequently there is no shareholder?
For example if the shareholder that died is the only shareholder and the estate now owns all the shares, can they all be redeemed so that the full value of the capital loss can be carried back.
Presumably if only a portion of the shares are redeemed, the value of the corporation has to be allocated of the total shares.
Is the corporation being wound up? If not, what does the will say - who inherits the corporation? Perhaps the shares should be transferred to them? Perhaps they need to subscribe for new shares?
This is tax lawyer time. Posthumous pipelines are a possible solution in these situations, but not without good legal advice as they are complicated. I’ve done a number of them in the last 10 years, but would never attempt it without a good lawyer.
I haven’t done a 164(6) carryback in quite a long time and I’d like to confirm the process. To summarize; In the T3, Sch 1, record the disposals. At field 1646 (line 19 of Sch 1) enter the amount that you are carrying back to the T1, as a positive number. In the T1-Final (which in my current case has not yet been filed), you have already recorded the deemed disposal(s) to date of death. Do you also repeat the disposals that you recorded in the T3? Is there anywhere you need to identify this as a 164(6) loss from the first year after death? Thanks.
Not sure why you say “already” or “repeat”?
The T1 Final reports deemed disposal at fmv on date of death, which must always be reported.
Actual dispositions (especially by a different tax reporting entity) are a completely different thing, and indeed, have a different “owner”, different acquisition date, and a different capital cost, and likely, a different POD.
The T1 final in your case sounds overdue? - so probably some haste should be made to get that filed…
Your client could already be on the hook for penalties and interest, effectively out of their personal pocket.
Executors are at great personal risk if they take estate tax returns too casually…
T1 is due April 30th. Date of death was in March 2020. Neither return is late. Sale of mutual funds was 7 days after death. We know there was a loss in that week. So to move that loss to the T1’s benefit, I am presuming I would “repeat” the T3’s data to Sch 3 of T1 to gain the benefit of the loss on the T1. Otherwise, how do you get the loss on the T1, Capital Losses of other years? That form doesn’t seem to contemplate the loss being carried back from a T3.
At the risk of “repeating” myself…
There is no such thing as a “repeat” (for the reasons already stated).
It sounds like the amount of money involved must be very very small, since Probate could not have been granted in 5 business days.
How is probate relevant here?
Situation is the Estate has a capital loss that can be carried back to T1-Final. How am I to enter that loss on the T1-Final?
Without probate, it could have been an illegal sale unless it was a very small amount.
Financial institutions usually do not act significantly on anyone’s instructions or give out much more than a pencil without probated will in hand.
I would draw up all the Estate accounts first, see what they look like.
From your description, it would appear that the T1-final has a capital gain to report and file
Yes, T1-Final does have a capital gain. Can the Estate’s loss be carried back to the T1-Final in the T1-Final’s initial filing?
“Can the Estate’s loss be carried back to the T1-Final in the T1-Final’s initial filing?”
You are attempting to do something that I cannot see is provided for in the text of ITA S164(6).
I agree with your reading of 164(6)(e) but will the CRA administratively accept the reporting of the T3 loss on the initially filed T1-Final?
I cannot see the CRA going out of their way to act contrary to the specific provisions of the Act.
Its not even a GRE until after the T3 is filed.
I don’t know if I have ever carried the loss back to a T1 return that has not yet been filed. In any instance of electing under subsection 164(6) that I have had the T1 return would have already been filed and the deduction (adjustment) is to line 253 or now 25300 of the T1 return.
I’m not sure if this is the correct procedure or not, but I would submit the T3 return noting the election as instructed, submit the T1 return without the loss claim, wait for the T3 to be assessed, then request an adjustment to the T1 return (if they haven’t automatically processed the request). If you claim the loss prior to the T3 assessment the CRA doesn’t have any record of the loss. Once again, this may not be the appropriate way, but it’s how I handle it.