“Terminal losses in the first year of an estate can be applied in a terminal return..”

Many practitioners are aware that capital losses incurred within the first year after an individual passes away can be carried back to offset capital gains reported in the terminal return. One of the rules that is not so well known is that a terminal loss can also be carried back and applied against income reported in the terminal return. If there is a terminal loss on the disposition of depreciable property, it can be applied against all income reported in the terminal return. A capital loss carried back can only be applied against capital gains.

For there to be a terminal loss within the first year following the passing of the individual, a depreciable property would have to decline in value from the date of death. This does not occur often. However, there have been occasions when, for example, real estate has declined in value significantly over a short period. It is important to bear this in mind in situations where the value of an asset of the estate may have decreased significantly within one year of the individual passing away. As with the capital loss carryback, the terminal loss carryback is provided for by subsection 164(6) of the Income Tax Act and a filing is required in the prescribed manner.