Dear Nancy Woods,
We are in the process of winding up my mother’s estate. We have submitted to the court the approval for the final will. In the meantime, the estate’s portfolio has suffered capital losses on paper. We weren’t able to sell anything until the will has been approved. If we sell the holdings what happens to the net capital loss? There haven’t been any gains since 2006. Signed, Steve
If you can wait for the distribution of the estate, you can sell or transfer in kind some of the holdings from the estate account that will result in a net break even. So if there is a holding that has a capital gain, sell something that has an equal capital loss.
Before you liquidate, calculate if the deceased has any capital gains that can use a capital loss to offset the tax liability. Only a net capital loss incurred in the estate in the first taxation year of it’s existence can be carried back and used to offset any capital gains on the deceased’s final return.
An unused capital loss incurred by the estate can be carried forward and used to offset any capital gains realized by the estate in a future year.
You can choose to keep the holdings in the estate that have a paper loss that have the highest chance of recovery in the short term (if possible). You will have to continue filing an income tax return for the estate until all assets are disbursed. You should be aware that an estate account should only remain open if there is a good reason, other than income splitting, for keeping it open.
If ultimately there is a net capital loss once the estate is wrapped up, it remains unusable.
Rather than realizing the loss in the estate, you may consider distributing the assets with accrued losses in kind to the beneficiaries. Capital assets can be transferred from an estate to the beneficiaries at their adjusted cost base. Then the losses can be realized and used by the beneficiaries.
When it comes to estate administration and taxes, it is best to seek professional tax and legal advice, especially before you make any liquidations or distributions.
Nancy Woods, CIM, FCSI, is an associate portfolio manager and investment adviser with RBC Dominion Securities Inc. To ask her a question, send an e-mail to firstname.lastname@example.org or visit her web site at nancywoods.com
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