What is “deemed disposition” and how can it be dealt with?
The CRA currently considers the capital assets of a person who has recently passed to have been disposed of at "fair market value" right before death. This is the “deemed disposition”.
This “deemed disposition” triggers a tax event, even though the Capital asset was never sold. The deemed disposition can create a capital gain or loss. This does not include depreciable properties or personal use properties.
As the ”deemed disposition” is reported as a capital asset disposition value at the fair market value, the transferee who receives the property recognizes the capital asset at the same fair market value as their cost of the property.
The transferor estate, however, may acquire the property in the case that there is no direct transferee. The estate is then considered a taxpayer for income tax purposes and must have a Tax Form T3: "Trust Return".
If the estate decides to sell the property, the resulting capital gain or loss is deemed by the cost of the acquisition. If this results in a capital gain or loss the estate has two options.
- The estate can report the capital gain or capital loss amount on the estate T3 Tax Return; or.
- If there is a capital loss in the first taxation year, the estate can elect to carryback the loss to the transferor’s year of death to offset the capital gains.
This second option may be a beneficial option to the estate if it has no capital gains or offset the capital loss.
The above information is of a general nature only and should not be relied upon for specific situations. Call Marlies Y Hendricks, CPA at 416-766-3941 or submit email enquiry form below to set up a consultation.
