Non-Residents Can Use Subsection 164(6)

“This election will not be available on property held in joint tenancy.”

In order to eliminate double tax as a result of the death of a taxpayer, subsection 164(6) of the Income Tax Act is often used. Subsection 164(6) allows executors to carry a capital loss realized in an estate back to offset capital gains realized in the taxpayer’s final tax return. However, the election is only available if the loss is realized within the first taxation year of the estate.

While the application of this subsection is common in respect of tax planning for Canadian taxpayers, it is also available to non-residents. Since there is no restriction in the definition of a taxpayer for the purposes of subsection 164(6), the CRA has confirmed that it is applicable to both residents and non-residents of Canada.

However, because non-residents are only required to include taxable capital gains and allowable capital losses from the disposition of taxable Canadian property (“TCP”) in their taxable income earned in Canada, the use of subsection 164(6) will be limited to losses from the disposition of TCP.

Of note is that the election is available with respect to a loss from the disposition of TCP that occurs in any period not exceeding 12 months from the date of death of a non-resident. This is a more generous result than may be realized by a resident decedent, since a resident’s estate may have a year end that is less than 12 months from the date of death.

However, for both resident and non-resident taxpayers, this election will not be available on property held in joint tenancy. In these situations, ownership of the deceased taxpayer’s property is automatically transferred to the surviving joint tenant and is considered to pass outside of the estate. The result, even if the surviving joint tenant disposes of the property at a loss, is that the estate cannot carry back the loss, as it would not be considered to be the owner of the asset and so would not be deemed to have incurred the loss.

When undertaking estate planning for non-residents, remember the possible application of ss 164(6). No matter where the taxpayer is resident, a review of jointly owned assets may be appropriate.

TAX TIP OF THE WEEK is provided as a free service to clients and friends of the Tax Specialist Group member firms. The Tax Specialist Group is a national affiliation of firms who specialize in providing tax consulting services to other professionals, businesses and high net worth individuals on Canadian and international tax matters and tax disputes.

The material provided in Tax Tip of the Week is believed to be accurate and reliable as of the date it is written. Tax laws are complex and are subject to frequent change. Professional advice should always be sought before implementing any tax planning arrangements. Neither the Tax Specialist Group nor any member firm can accept any liability for the tax consequences that may result from acting based on the contents hereof.

Posted in

Cadesky Tax