Jan 13, 2026
When a loved one dies, taxes can impose a substantial and often unexpected burden on their estate.
In Canada, the deemed disposition rules that apply at death frequently give rise to significant capital gains, and in certain circumstances, the same underlying value can be taxed more than once. Subsection 164(6) of the Income Tax Act (the “ITA”) offers a loss carryback strategy that can mitigate this result.
For high-net-worth families, understanding this corporate tax planning opportunity can be critical to preserving wealth for future generations.
Double taxation issue
Under paragraph 70(5)(a) of the Income Tax Act, an individual is deemed to dispose of all capital property immediately before death at fair market value. Even though no actual sale occurs, any resulting capital gains are reported on the deceased’s terminal return. Where the deceased held shares of a private corporation, these deemed disposition rules can result in double taxation of the same economic value.
Consider Ms. Owner, who owned a private corporation holding an investment portfolio. On her death, she is deemed to have disposed of her shares at fair market value, triggering a capital gain reported on her final return (Tax Event 1).
The estate is then deemed to acquire the shares at that same value. When the executor later liquidates the corporation’s assets or investments, further gains may arise at the corporate level, and the corporation pays tax on those gains.
The remaining funds are distributed to the estate as a wind-up dividend, which is taxed again at dividend rates (Tax Event 2). As a result, the growth in the investment portfolio is effectively taxed twice—once on death at the shareholder level and again upon distribution from the corporation.
Subsection 164(6) Loss Carryback Strategy
A significant capital loss may arise where the Graduated Rate Estate (“GRE”) realizes proceeds that are lower than the high adjusted cost base it acquires on death. By making an election under subsection 164(6) of the Income Tax Act, this capital loss can be carried back to offset the capital gain reported on the deceased’s terminal return. Provided the loss is realized in the GRE’s first taxation year, the subsection 164(6) election can effectively eliminate double taxation. The carryback may be claimed by filing an amended T1 return or by requesting the application of the loss with the original terminal return.
The effectiveness of this strategy generally assumes that corporate assets with accrued gains are sold before the corporation is wound up or its shares are redeemed. This sequencing helps preserve corporate tax attributes, such as the capital dividend account (“CDA”) and refundable dividend tax on hand (“RDTOH”), which can mitigate dividend tax. However, the allowable capital loss available for carryback may be limited where an excessive CDA dividend has been paid.
Access to the subsection 164(6) strategy requires the estate to qualify as a GRE. To maintain GRE status, the estate must be a testamentary trust, the executor must designate it as a GRE in its first taxation year, and no other estate of the deceased may be so designated. Care must be taken to preserve this status, as it can be inadvertently tainted—for example, through certain loans made to the estate.
A GRE is one of the few trusts entitled to graduated tax rates for up to 36 months following death, after which top marginal rates apply. During this same period, the GRE is also permitted to have a non-calendar taxation year-end, allowing continued access to graduated rates by aligning the year-end with the date of death.
The subsection 164(6) strategy is relatively cost-effective and can eliminate terminal double taxation, reducing the combined tax burden to approximately 47.74%. However, while this approach reduces overall tax relative to no planning, it does not account for the fact that capital gains are generally taxed at lower rates than non-eligible dividends. As a result, the GRE ultimately pays tax at dividend rates on fair market value rather than capital gains rates. This strategy is therefore most effective where the estate can be administered promptly, as losses realized after the GRE’s first taxation year are ineligible for carryback.
Additional considerations regarding loss carryback strategy
To access the subsection 164(6) loss carryback strategy, an estate must qualify as a graduated rate estate (“GRE”) by designating itself as such in its first T3 return. Maintaining GRE status requires satisfying several conditions, including preserving testamentary trust status, which can be inadvertently compromised—for example, if beneficiaries pay estate expenses directly. Careful administration is therefore essential.
Historically, the loss giving rise to the carryback had to be realized within the GRE’s first taxation year, a requirement that often proved impractical due to delays in estate administration, probate, or will challenges. Draft legislation released by the Department of Finance in August 2024 provides meaningful relief by extending the applicable period to the first three taxation years of the estate for individuals who die on or after August 12, 2024. While this extension improves flexibility, complex estates may still encounter timing challenges.
Corporate tax attributes can further enhance the effectiveness of the loss carryback strategy. Where a private corporation holds assets such as life insurance, refundable tax balances, or a capital dividend account (“CDA”), these attributes can be coordinated to reduce overall tax. For example, in the context of an estate freeze, a corporation’s CDA may be used to redeem shares and pay tax-free capital dividends, while refundable tax balances can generate corporate tax refunds.
These transactions may trigger capital losses at the estate level, which can then be carried back under subsection 164(6) to offset gains reported on death. Although stop-loss rules may limit relief, planning techniques can mitigate their impact and improve the overall tax outcome.
Pro tax tips – estate executors should seek professional advice early
Overall, under the loss carryback strategy, a graduated rate estate (GRE) should generally elect to carry back a capital loss incurred in its first taxation year after the shareholder’s death to the deceased’s terminal taxation year.
This election is available to the extent that the capital loss exceeds any capital gains realized by the GRE in its first taxation year. The carried-back capital loss may then be used to offset capital gains arising from the deemed disposition of property on death.
It’s recommended that executors obtain legal and tax advice with an experienced Canadian tax lawyer at an early stage of estate administration to ensure that available losses are used effectively.
FAQ:
What is deemed disposition on death?
When a person dies, he is considered to have sold all his property just prior to death, even though there is no actual disposition or sale. This is called a deemed disposition and may result in a capital gain or capital loss, unless the property or asset is transferred to a spouse or common-law partner or a specific exception applies.
What is the potential double taxation issue upon death?
Double taxation upon death is a significant issue in Canadian tax law, primarily impacting individuals who own shares in a private corporation. It occurs when the same asset is taxed twice: once at the individual shareholder level upon death and again at the corporate level or when funds are distributed to beneficiaries.
What is the loss carryback strategy under s.164(6) of the Income Tax Act?
The loss carryback strategy helps prevent double taxation in the context of an individual’s death and their private corporation shares by using a capital loss realized in the estate to offset the capital gain reported on the deceased’s final tax return. This effectively eliminates one layer of tax.
Disclaimer: This article just provides broad information. It is only up to date as of the posting date. It has not been updated and may be out of date. It does not give legal advice and should not be relied on. Every tax scenario is unique to its circumstances and will differ from the instances described in the article. If you have specific legal questions, you should seek the advice of a Canadian tax lawyer.
