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T1 Net Capital Loss Carryback in Year of Death

Net capital losses in year of death are not limited to capital gains, but are deductible against any source of income.

TaxCycle correctly applies current year Net Capital Losses as a negative amount on line 127 (Taxable Capital Gains). However, TaxCycle also puts that same figure on line M of the Request for Loss Carryback Schedule as if it was still available to be carried back to a prior year.

I agree that you can deduct this loss in year of death, but I don’t think you are able to deduct the loss on line 127 and carry it back to a prior year as well. It seems that would be double dipping.

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Timely explanation…thanks Snoplow…

I was fighting with one that was rejecting at eFile yesterday, for just this reason.

Mike

In my experience, a negative amount at Line 127 on a Final T1 results in an efile rejection; it also does not appear on the NoA as such, even though the NoA Line 150 reflects the the reduction. Additionally, a subsequent reassessment - for a separate issue - had the Line 127 amount, which had not changed & still did not show, excluded from Line 150, which after my prompting, resulted in a second, correct, reassessment.
Seems CRA systems are not designed to deal with net capital loss balance inclusions on a Final T1; have had this happen on several occasions .

I believe your experiences with this Garfield. I find it odd that the CRA themselves tell you to enter the amount on line 127 as a negative, yet their system can’t take a negative in that field.


Method B - You can choose not to carry back the net capital loss to reduce taxable capital gains from earlier years. You may prefer to reduce other income on the final return, the return for the year before the year of death, or both returns. However, before you do this, you have to calculate the amount you can use.

From the net capital loss, subtract any capital gains deductions the deceased has claimed to date. Use any loss remaining to reduce other income for the year of death, the year before the year of death, or for both years.

If you claim any remaining net capital loss in the year of death, you should claim it as a negative amount in brackets at line 127 of the final return.

https://www.canada.ca/en/revenue-agency/services/tax/individuals/life-events/what-when-someone-died/net-capital-losses/net-capital-losses-year-death.html

…yes, its about time this was addressed by them - perhaps it doesn’t happen often enough to meet their threshold for action.
Thanks Wayne.

I had this problem a couple of years ago.
My workaround to get the return to e-file was: put a zero amount on line 127, and enter the loss on line 232.
I found this workaround did not change my tax results but it may be different for your file.
I did have CRA query my line 232 deduction later on but once explained, CRA accepted.

To provide further information to this topic;

I Efiled a T1 return today for a deceased client which included a negative amount of about $5,000 on line 127 (Taxable Capital Gains). The return was accepted, so the system will take a negative amount on line 127, being a deductible net capital loss in year of death.

The only thing out of the ordinary that I did do before transmitting the T1, and I don’t know whether this has any effect or not on whether the file was accepted, was I went to the T1A and over-rode the amount on line M from $5,000 to Zero, as in my opinion, if the losses were claimed on line 127 they couldn’t possibly be available on line M of the T1A as being available for Carry-back.

I received the Notice of Assessment for the Deceased T1 Return where I had claimed a Capital Loss in the Year of Death. The CRA did process the return and did take into account the negative amount on line 127.

As was previously mentioned, they did have a bit of a difficult time with it, as line 150 (Total Income) on the Notice of Assessment is higher than the actual line 150 income on the T1 by exactly the amount of the net capital loss. The NoA does show the negative on line 127 but it doesn’t get added into line 150 on the NoA (nor line 236 - Net Income).

There are no deductions from Net Income on the T1 return, or the NoA, yet the Taxable Income is the correct amount, so somehow the CRA deducted the negative amount from line 127 between Net Income and Taxable Income.

This would be fine except… and this is where the NoA differs from the Software.

The client’s Medical Expenses are based on 3% of the Net Income reported on line 236. The Net Income that is calculated by TaxCycle includes the Capital Loss claimed on line 127, whereas the higher Net Income figure on the Notice of Assessment was what the CRA used to calculate their medical expense deductible.

Therefore… the Notice of Assessment resulted in a higher balance due than the T1 return that I filed because the CRA did not include the capital loss on line 127 when calculating the 3% deductible. The result is the client owes income tax on 3% of the net capital loss deducted in year of death because the medical expense claim was reduced.

If the CRA are correct in their Assessment then TaxCycle needs to ignore any negative amount on line 127 in year of death when it comes to calculating the Medical Expense deductible.

I will write in and ask for the Return to be adjusted to what I filed and see what they say.

Snowplowguy:
Notwithstanding their (CRA) workaround instructions to enter the negative amount on line 127, I had thought that such loss applications are pursuant to S111? (ie a lower line 252/253 deduction)

If so, then it should presumably be correctly disregarded with regards to the income figure to be used for medical 3%, which does seem to allow for subdivision e deductions (S60 to S66) but I haven’t found anything that says that (Medical) allows for S111 deductions.

ie CRA appear correct in the income used for medical,
(but it is strange that they want Line 127 to be used for reporting - must be to work around something else)…

If you had continued your CRA copy/paste above, it also says:
“Note Do not use a capital loss claimed against other income at line 127 in the calculation of net income for the purposes of calculating other amounts such as social benefit repayments, provincial or territorial tax credits, and those non-refundable tax credits requiring the use of net income.”

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Thank you Joe,

You are correct… I should have kept reading.

This appears to be a software calculation error.
When I prepared the T1 return using Profile (as I always do as an OCD double check) I now notice that I had over-ridden their 3% of Net Income figure on the Medical Expense Schedule to match what TaxCycle had calculated. It seems in this instance, I should have over-ridden the 3% of Net Income figure that TaxCycle had calculated on the Medical Expense Worksheet to match that of Profile.

Essentially, I feel that TaxCycle needs to alter its calculation such that 3% of Net Income is calculated by ignoring any negative number on line 127. I do confirm that TaxCycle properly ignores the negative number on line 127 for the purposes of calculating the Social Benefits Repayment, so it’s odd they would miss the Medical Expense Deductible.

In addition, I still maintain that TaxCycle should also reduce or remove the Net Capital Loss amount from line M in Part 5 of the T1A (Request for Loss Carryback) for any amount that has been claimed on line 127 in the year of death.

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In today’s release, the medical expense limit will be using adjusted net income, excluding the loss at line 127 for a deceased client. This limit calculation was missed when we did the adjustment to the many other amounts where it was needed. Thanks for pointing it out!

As for the T1A, on the CRA page referred to above, the only difference between Methods A and B is that Method A starts with carrying back current year losses to the 3 previous years using the T1A. Then both methods indicate how capital gains deductions claimed by the client must be deducted from the current year loss, or the remaining balance after the T1A carryback.
On our Net Capital Loss Worksheet, we will need to add a line in the section for applying the loss against other income in the year of death to deduct the portion carried back on the T1A, if any. Thus no change is needed to the T1A.

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Thanks for looking at this @Allen.

What I am referring to with regard to the T1A, is that line M in part 5 shows the Net Capital Loss for the year, even though this amount has been claimed on line 127 in the year of death.

Although there is a negative amount (ie claimed amount) on line 127, I can take that amount on line M on the T1A and apply it to line 6636, 6637, or 6638 (2015 to 2017) without the amount from line 127 changing.

To me, what this means, is the software is allowing me to claim the current year net capital loss in the year of death (line 127) as well as allowing me to apply it to a prior year on the T1A.

Does what I’m trying to say make sense?

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