Net capital losses expire at the end of the year in which a taxpayer dies. However, allowable capital losses realized in the year of death, or any unused net capital loss carryforwards from prior years, may be used against any source of income in the year of death and in the immediately preceding year.

Because net capital losses can be carried forward and used against any income in these years, it is worth enquiring whether a deceased taxpayer had any prior capital losses not yet reported for tax purposes. If capital losses had not been reported, the Canada Revenue Agency will probably allow the capital loss in the year it was incurred, provided that appropriate documentation is available. The net capital loss, using the appropriate percentage for the year of loss, would then form part of the net capital loss carryforwards in the year of death.

For example, if a deceased taxpayer realized a capital loss eight years prior to death, but did not report it, the net capital loss can be reported on the terminal return or in the return for the calendar year prior to death. It can be used to offset items such as RRSP income inclusions and other deemed realizations reported on either return.

Identifying unreported capital losses from prior years can result in significant tax savings.

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The material provided in Tax Tip of the Week is believed to be accurate and reliable as of the date it is written. Tax laws are complex and are subject to frequent change. Professional advice should always be sought before implementing any tax planning arrangements. Neither the Tax Specialist Group nor any member firm can accept any liability for the tax consequences that may result from acting based on the contents hereof.