Net capital losses
Capital losses can be used to reduce overall taxable income in the Final Return of a deceased person.
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Gather all eligible capital losses for the Final Return
In addition to net capital losses incurred from January 1 to the date of death, other net capital losses can also reduce income in the Final Return of the deceased person, if they were unapplied in previous tax years or if they are from the first year of a Graduated Rate Estate (GRE).
Unapplied net capital losses from previous tax years
If the deceased person has unapplied net capital losses from previous tax years, you will need the following information from the deceased’s tax records for each tax year:
- Unapplied net loss
- Net loss applied from prior year
- Net loss applied from subsequent year
- Capital gains deduction allowed
These can be found in Represent a Client under "Carryover amounts" in the Tax returns section.
How to adjust unapplied net capital losses from previous tax years for the Final Return.
Net capital losses from the year of death
A net capital loss may be calculated on line 19900 of Schedule 3 of the Final Return.
Net capital losses transferred from the first tax year of a Graduated Rate Estate (GRE)
If you have not yet filed the Final Return, skip this section. The legal representative will need to amend the Final Return after filing the T3 Trust Income Tax and Information Return (T3 Return) for the estate.
If the estate disposes of capital property, the result may be a net capital loss on the T3 Return. Additionally, if the estate disposes of depreciable property, the result may be a terminal loss on the T3 Return.
In the first tax year of a deceased person's GRE, the legal representative can elect to treat all or part of these losses as losses of the deceased person on the Final Return.
A net capital loss realized in this first tax year of the estate cannot be applied to any tax year before the year of death.
How to complete the transfer of losses
File the T3 Return for the first year of the estate and complete T3 Schedule 1 Dispositions of Capital Property. Include on line 20 of that schedule, “Total capital losses transferred under subsection 164(6)”, the amount being transferred to the deceased person’s Final Return.
File an amended Final Return and clearly identify at the top of the return that you are amending it as a result of a subsection 164(6) election.
- If you are applying a net capital loss from the T3 Return, you can subtract it directly from the line 12700 amount on the amended Final Return. There is no need to adjust it or report it on a separate line.
- Apply any remaining unapplied net capital losses of the GRE transferred with the 164(6) election against other forms of income, as if you were applying other losses from the year of death.
For more information on filing the election under 164(6) see Chapter 3 of T4013, T3 Trust Guide.
Apply unapplied net capital losses against capital gains in the Final Return
Refer to Taxable capital gains on belongings, property, and investments to calculate capital gains for the Final Return.
If there is a taxable capital gain on line 12700 of the Final Return, you must first apply unapplied net capital losses against this capital gain.
You must apply your net capital losses in order of oldest to latest tax year. Any remaining net capital losses (other than capital losses carried back from the first year of a GRE) may be applied to reduce other income for the year of death or the year before the year of death, but only to the extent that those unapplied net capital losses exceed the amount that the deceased person claimed in respect of the capital gains deduction.
If you claim a capital gains deduction for the year of death or the year before the year of death, subtract it from the balance of net capital losses you have available to reduce other income in those years. For more details about capital gains and losses, as well as the capital gains deduction, see Guide T4037, Capital Gains.
Adjust unapplied net capital losses from previous tax years
To apply an unapplied net capital loss from a previous tax year, you must:
- Adjust the unapplied prior year net capital loss by the adjustment factor for the tax year in which it was incurred (refer to the table below).
- This is required to calculate the net capital losses that are available for the Final Return
- Claim allowable net capital losses (from step 1) on line 25300 up to the full amount of capital gains reported on line 12700.
- If there are remaining unapplied net capital losses, readjust the remainder back to an amount for the taxation year from which it originated, using the readjustment factor for that tax year (refer to the table below).
- Subtract the total capital gains deduction claimed in all years from the amount in step 3.
- Claim on line 25300 any remaining amount of unapplied losses (from step 4) you can apply against other income up to the full amount of other income on the return (this amount cannot create a taxable loss).
| Tax year | Inclusion Rate | Adjustment Factor | Readjustment Factor |
|---|---|---|---|
| Before May 22, 1988 | 1 over 2 | 1 (no adjustment) | 1 (no adjustment) |
| In 1988 and 1989 | 2 over 3 | 3 over 4 | 4 over 3 |
| From 1990 to 1999 | 3 over 4 | 2 over 3 | 3 over 2 |
| In 2000 | Variable - check in Represent a Client | 1 ⁄over (2 x [Inclusion Rate for 2000]) | 2 x [Inclusion Rate for 2000] |
| From 2001 to 2023 | 1 over 2 | 1 (no adjustment) | 1 (no adjustment) |
Example of adjustments to unapplied losses from previous years
A person died in August of 2023. You have these details about their tax matters:
- Capital loss in 1999: $24,000
- Taxable capital gain in 2023: $6,000
- Capital gains deductions claimed to date: $4,000
In the original return for 1999, the net capital losses were calculated as:
- $24,000 (capital loss in 1999)
- multiplied by 3/4 (inclusion rate for 1999)
- equals $18,000 (net capital loss from 1999, never applied)
This leaves an unapplied net capital loss of $18,000 to be carried forward to other tax years.
You decide to use the 1999 loss to reduce the 2023 taxable capital gain and to use any amount left to reduce other income for 2023.
You have to adjust the 1999 net capital loss before you can apply it. Multiply it by 2/3 to get the adjusted net capital loss:
- $18,000 (net capital loss in 1999, never applied)
- multiplied by 2/3 (adjustment factor for 1999)
- equals $12,000 (adjusted net capital losses to be applied against capital gains)
Note that $12,000 is 1/2 of the original capital loss from 1999 of $24,000. The Inclusion Rate for 2001 and later years is 1/2.
To reduce the 2023 taxable capital gain, use the lesser of:
- $12,000 (adjusted net capital loss)
- $6,000 (2023 taxable capital gain)
After you use $6,000 of the loss to reduce capital gains on line 12700 to zero, you still have $6,000 ($12,000 – $6,000) remaining in unapplied capital losses. You can use this amount to reduce the deceased’s other income for 2023 and 2022.
To determine the amount to use, you have to readjust the $6,000. Because the loss occurred in 1999, multiply the amount left by 3/2 to get the readjusted balance:
- $6,000 (remainder of adjusted capital losses to be applied against capital gains)
- multiplied by 3/2 (readjustment factor for 1999)
- equals $9,000 (readjusted capital losses)
From the readjusted balance, subtract all capital gains deductions claimed to date:
- $9,000 (readjusted capital losses)
- minus $4,000 (all capital gains deductions claimed in all tax years)
- equals $5,000 (net capital losses to be applied to other income in the Final Return)
You can use $5,000 to reduce the deceased’s other income for 2023. However you cannot reduce the taxable income to a negative amount. If you decide not to use the total of this balance in 2023, you can use the amount that is left to reduce other income for 2022.
Apply net capital losses from the deceased person’s year of death against other types of income
If there is a net capital loss computed at line 19900 on Schedule 3 in the Final Return, and there are no unapplied net capital losses of prior years, you can apply them to reduce other income in the Final Return, the T1 Return for the year before the year of death, or both returns, or against capital gains in any of the last 3 tax years before the year of death, using one of the following calculation methods:
Method A: Reduce previous year capital gains before applying against other income in the year of death and/or the previous year
Using Method A, you may carry back a net capital loss from the Final Return to reduce any taxable capital gains from the last 3 tax years before the year of death.
Any remaining net capital loss balance is then reduced by any capital gains deductions the deceased person has claimed in all tax years before you apply the remaining net capital losses against other income for the year of death, the year before the year of death or both years.
How to carry a net capital loss back to a prior year return
You can carry back a 2023 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 2020, 2021, or 2022, 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.
Subtract previously claimed capital gains deductions
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 that were not applied against prior year unapplied losses.
Apply the remainder to reduce other income
Use any remaining net capital loss 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 of the Final Return.
You cannot reduce some income types with a capital loss
Do not use a capital loss claimed against other income at line 12700 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.
Method B: Apply against other income in the year of death and/or the previous year
You can choose not to carry back the net capital loss to reduce taxable capital gains from earlier years. In this case, you may apply capital losses against any capital gain and other income on the Final Return, the return for the year before the year of death, or both returns.
Subtract previously claimed capital gains deductions
From the net capital loss, subtract any capital gains deductions the deceased person has claimed to date.
Apply the remainder to reduce other income
Use any net capital 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 12700 of the Final Return.
Example comparison of Methods A and B
A man died on June 20, 2023. You have the following details about his tax matters:
- Net capital loss in 2023: $11,000
- Taxable capital gains in 2021: $4,000
- Taxable capital gains in 2020: $2,000
- Total capital gains deductions claimed to date: $4,000
He did not claim any capital gains deductions for 2020 or 2021.
You can use Method A or Method B.
Method A
If you choose Method A, you can use the net capital losses in 2023 to reduce his 2021 taxable capital gains to zero ($11,000 – $4,000). Then, you can use the remaining balance of $7,000 to reduce his 2020 taxable capital gain to zero ($7,000 – $2,000).
After you subtract his capital gains deductions ($5,000 – $4,000), you still have $1,000 left to reduce the man’s other income for 2023 or 2022 or for both years.
Method B
If you choose Method B, you will first deduct his capital gains deductions of $4,000 from his net capital loss in 2023 of $11,000. You can now use the remaining $7,000 to reduce the man’s other income for 2023 or 2022, or for both years.
Request an adjustment to a previous year return
If you claim any remaining net capital loss to reduce other income in the year before the year of death, you will need to complete Form T1-ADJ, T1 Adjustment Request, or send the CRA a signed letter providing the details of your request.
Send your Form T1-ADJ or letter separately from the deceased person’s Final Return. Applying a 2023 net capital loss to a previous year may reduce any capital gains deductions the deceased person claimed in that year or a following year.
Claim the losses on Line 25300 - Net capital losses of other years
Apply net capital losses in a T3 Return
Any allowable capital losses incurred by the estate of the deceased person are included in line 24 of a T3 Schedule 1 Dispositions of Capital Property after completing the capital gains calculation for a T3 return.
You may choose to treat the net capital losses from the first year of a GRE as losses of the deceased person to be applied against taxable capital gains or other income in that person’s Final Return if an election is filed under subsection 164(6). An estate’s unapplied net capital losses of other years can be applied against current year taxable capital gains on line 34 of the T3 Return. Any remaining unapplied net capital losses of other years may be applied against the trust's taxable capital gains in any of:
- the 3 preceding tax years
- the trust's future tax years
You cannot deduct a net capital loss from other income of the trust in the year, and you can only allocate capital losses to beneficiaries of a trust when it is an insurance-related segregated fund trust.
For more details on how to apply net capital losses in a T3 Return, refer to Chapter 2 of the T4013 T3 Trust Guide.
Request for loss carryback by a trust
To request to carry back an unused loss of a trust to a previous trust tax year:
- The trust would file Form T3A, Request for Loss Carryback by a Trust in connection with the loss year to request the loss be carried back to the prior year
- The trust would file Form T3-ADJ, T3 Adjustment Request for the prior year to reflect a late subsection 104(13.1) or (13.2) designation so as to amend the trust’s T3 Return
- The trust would issue amended T3 slips to the beneficiary for that prior year, reducing the income allocated
- The beneficiaries would file a Form T1-ADJ, T1 Adjustment Request to reflect the revised T3 slip and to amend their T1 Return
For more details on how to request a loss carryback by a trust to a previous trust tax year, refer to Chapter 2 of the T4013 T3 Trust Guide.
Listed personal property losses
Losses on listed personal property (LPP) can be applied only against LPP gains. For more details, refer to listed personal property losses.
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