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Yvonne's recently-passed husband had capital losses. Did she maximize the claim on his final tax return?
Q: My husband passed away last year and at that time he had unused net capital losses from other years. The accountant who did the final tax return in June 2017 did not find enough income to offset all of those capital losses.
Recently I found out that I could have had part of his RRIF count as income rather than have it all rolled over into my name.
Can this still be changed now?
—Yvonne
A: I’m sorry for your loss, Yvonne. It can be overwhelming emotionally to lose a loved one, but the financial implications can also be a lot to handle.
Generally speaking, capital losses can only be claimed against capital gains incurred:
1) in the current year;
2) in the previous three years, by filing a Request For Loss Carryback (form T1A) with your current year tax return, if you have a net loss for the current year;
3) in the future, by carrying them forward and deducting them on a future tax return against future capital gains, if you have a net loss for the current year.
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In the year of death, there are special tax rules for capital losses. If you incur capital losses in the year of death, you can use the losses to reduce capital gains in the year of death. If you have a net loss for the year, you can carry losses back to offset capital gains for the three previous years. If you still have losses left over, you can deduct the excess capital losses against other sources of income on the taxpayer’s final tax return or the tax return for the prior year.
If you are claiming the loss against other income sources on the final tax return, you do so by claiming a negative amount on line 127. If you are claiming the loss for the prior year, you must file a T1 Adjustment Request (form T1-ADJ) or write a letter to Canada Revenue Agency (CRA) to make the request.
In your case, Yvonne, with net capital losses incurred in a previous year — not in the year of death specifically — the losses can also potentially be claimed. You can deduct them against:
1) capital gains in the year of death;
2) other income in the year of death;
3) other income in the year prior to the year of death.
If you are claiming the losses against other income sources on the final tax return, you do so by claiming it on line 253 (net capital losses of other years). If you are deducting the losses against the prior year’s income, you must file a T1 Adjustment Request (form T1-ADJ) or write a letter to CRA to make the request.
All that said, it sounds like you have already filed your husband’s final tax return, Yvonne. If there were losses you didn’t claim that you could have claimed, you should file an adjustment.
You mentioned having part of his Registered Retirement Income Fund (RRIF) taxed on his final tax return. A RRIF is fully taxable on the final tax return of the deceased, with a potential offsetting deduction if the RRIF is transferred to a spouse. I suspect you claimed an offsetting deduction to fully offset this income inclusion. It may not be necessary to reduce the deduction and have part of his RRIF income taxed on his final tax return if you can claim the capital losses against his prior year’s income.
Regardless, I would speak to the accountant who filed the tax return and ask for their assistance to file a T1 Adjustment. Most accountants will have limited experience in filing tax returns for deceased taxpayers since few of their clients die in any given year.
In this world, nothing is certain but death and taxes. It sounds like there was a bit of uncertainty in filing your husband’s final tax return, Yvonne, but you can still make the most of his capital loss carryforward.
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Jason Heath is a fee-only, advice-only Certified Financial Planner (CFP) at Objective Financial Partners Inc. in Toronto, Ontario. He does not sell any financial products whatsoever.
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Revenue Canada states that …that before you can claim capital loss in last year of death against other sources ..you must substract the loss against any capital gains deductions the deceased has claimed to date.
From the net capital loss you have left, subtract any capital gains deductions the deceased has claimed to date. Use any loss left to reduce other income for the year of death, the year before the year of death, or for both years.
Net capital losses in the year of death
To apply a net capital loss that was incurred in the year of death, you can use either Method A or Method B.
Method A – You can carry back a 2019 net capital loss to reduce any taxable capital gains in any of the 3 tax years before the year of death. If you are applying it against taxable capital gains realized in 2016, 2017, or 2018, you do not need to make any adjustment because the inclusion rate is the same in all 3 years. The loss you carry back cannot be more than the taxable capital gains in those years. To ask for a loss carryback, complete “Section III – Net capital loss for carryback” on Form T1A, Request for Loss Carryback, and send it to your tax centre. Do not file an amended return for the year to which you want to apply the loss.
After you carry back the loss, there may be an amount left. You may be able to use some of the remaining amount 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 you have left, subtract any capital gains deductions the deceased has claimed to date. Use any loss left 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 12700