Revised Stop-Loss Rules For Post Mortem Planning

Volume No. 05-02

“Proposed rules allow post mortem estate planning..”

Subsection 40(3.6) is a stop-loss rule that defers the recognition of a loss when there is a loss on shares that an affiliated person continues to hold.

There were proposed amendments to subsection 251.1(1) dealing with when a person is affiliated with a trust. Under these new rules related to a trust, a person would be affiliated to the trust where the person is a majority interest beneficiary. The result of this was a significant problem with regard to estate planning in order to take advantage of a loss in the first year of the estate under subsection 164(6). Normally, the executors of the estate would create a loss in the first year of the estate and the loss would be carried back against capital gains in the terminal return. However, with the proposed new rules, the loss could have been denied in many situations.

New subsection 40(3.61) is meant to ensure that the stop-loss rules under subsections 40(3.4) and 40(3.6) do not apply to any portion of an estate capital loss carried back under subsection 164(6). Therefore, if a capital loss is being created to carry back against a capital gain in a terminal return, it will not be deferred or denied under subsections 40(3.4) or 40(3.6). This is a significant proposal that could affect many many estates. These proposed rules will apply to dispositions occurring after March 22, 2004.


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