There can be tax advantages in dying!

Yes it’s true. The tax man does give you a few breaks the year you die, which links the old “death and taxes” adage in an eerily positive way! In the case of capital losses, for example, one can normally only deduct net capital losses against income reported from taxable capital gains. If there are no such gains, then the losses can be either carried back three years and applied in a tax year in which there were taxable capital gains (and no capital gains deduction available), or failing that, carried forward indefinitely. This has been made even trickier for those with losses in Tax Year 2000, as varied inclusion rates have resulted from two federal budgets in that year.

Here’s the good part: in the year of death, the rules are slightly different. If a net capital loss occurs in the year of death (either due to a transaction before date of death, or as a result of deemed disposition of capital property on death) and the loss(es) exceed any capital gains from that year, then you might be able to claim the loss against all other income for the year. There are two options as to how one might apply net capital losses in the year of death:

Method A – Carry back aet capital loss to reduce any capital gains incurred in the three years before the year of death. If after applying this carry-back, there is still an excess loss remaining, then this remaining loss can be used to reduce all other income on the final return (year of death) or the prior year, or both. Before doing so however, you must reduce this remaining loss by any capital gains deductions claimed by the deceased in prior years.

Method B – You may not wish to carry back any capital losses from the year of death. You may wish to use all of the loss to reduce taxable income on the final return. However, before you can do this you must reduce the net loss by any capital gains deductions previously claimed. After this has been done, you can use whatever’s left to reduce all other income.

You can also use unapplied capital losses incurred before the year of death as well. There are couple of adjustments that might need to be made if the losses were incurred prior to 1990, and again they will need to be reduced by any previously claimed capital gains deductions. It would be best to use up those losses on the final return; then look at other available special provisions.