Presentation Material - McCarthy Tétrault

Chris Falk
Stefanie Morand
McCarthy Tétrault LLP
• Recent commentary suggests that in appropriate cases it may be helpful to complete the
transactions within the estate’s first taxation year so that subsection 164(6) capital loss
carry-back planning may be available as a “fallback” option. 56
SUBSECTION 164(6) CAPITAL LOSS CARRY-BACK PLANNING
Background
As discussed above, subsection 164(6) capital loss carry-back planning is another technique
employed by tax practitioners to relieve against the double taxation that can arise under the Act
as a result of the deemed disposition on death.
Subsection 164(6) is an exceptional provision in that it allows, in some circumstances, a capital
loss sustained by the estate to be carried back to the deceased’s terminal return and applied
against the capital gain that arose as a consequence of the deemed disposition on death. The
provision requires that the loss be sustained in the estate’s first taxation year, 57 and is subject to
numerous stop-loss rules.
In a 2006 Tax for the Owner-Manager article, 58 Nick Moraitis and Manu Kakkar discussed a
potential circularity problem with estate loss carry-backs owing to the drafting of subsections
40(3.6), 40(3.61) and 164(6). This summer at the 2012 STEP Round Table, the CRA was
asked to comment on the interaction of these provisions and, in so doing, expressed a view that
could render subsection 164(6) capital loss carry-back planning unavailable for many estates.
The authors comment below on the issue raised at the 2012 STEP Round Table and the CRA’s
response. In summary, it is the authors’ view that:
• given the text, context and purpose of subsections 40(3.6), 40(3.61) and 164(6), the
provisions should be interpreted in a manner which does not give rise to the circularity
issue identified in the Moraitis/Kakkar Article and addressed in the CRA’s recent
response;
• if, however, contrary to what in the authors’ view is the better interpretation, the
provisions are to be interpreted so as to give rise to the circularity issue due to a
technical flaw in the drafting of subsection 40(3.61), a legislative fix is required so as not
to frustrate the underlying purpose and policy of the provisions; and
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Paragraph 88(1)(d.1). In this case, the issue should then focus on GAAR; whether there has been a misuse or
abuse for purposes of section 245 notwithstanding: (i) the deemed disposition on death; (ii) the provisions of
section 84.1; and (iii) that the estate should not normally be regarded as an “accommodation party” in facilitating
a surplus strip.
Stuart Bellefer, “Summary of the CRA Round Table Held at the 13th National STEP Canada Conference”
(August 2011) 199 CCH Estate Planner Newsletter, 4-6 (which notes that it would generally be necessary to latefile
the subsection 164(6) designation, which would require that a fairness request be brought by the taxpayer
pursuant to subsection 220(3.2) and Income Tax Regulation 600(b)).
The provision does not refer to the first calendar year following the death of the deceased. Planners should be
careful not to inadvertently trigger an early taxation year by, for example, running afoul of the “anti-stuffing” rules
in the proposed amendments to the definition of “testamentary trust” in subsection 108(1).
Nick Moraitis and Manu Kakkar, “Potential Circularity Problem with Estate Loss Carryback”, (July 2006) 6:3 Tax
for the Owner-Manager (ctf.ca) (the “Moraits/Kakkar Article”).
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