The trust cannot deduct a capital loss sustained on the disposition of non-depreciable property (the “original property”) if:
- in the 30 days that precede and the 30 days that follow the disposition, the trust or an affiliated person acquires substituted property that is, or is identical to, the original property; and
- at the end of the period, the trust or an affiliated person still owns the substituted property or has the right to acquire it.
However, the loss may be deducted later as a loss deemed to have been sustained immediately before the time at which the earliest of the following events occurs:
- The substituted property is disposed of in favour of a non-affiliated person. However, during the 30-day period following the disposition, neither the trust nor an affiliated person may own:
- the substituted property; or
- property that is identical to the substituted property and that was acquired during the 30 days that preceded the disposition.
- The substituted property is deemed to have been disposed of. This is the case if:
- the trust ceases to be resident in Canada at the time it owns the substituted property;
- the property is a debt that has become a bad debt, or a share issued by a corporation that has gone bankrupt or that was insolvent at the time it was wound up.
- The trust becomes subject to a loss restriction event.
The trust cannot deduct a capital loss sustained on the redemption of shares other than distress shares if the corporation that issued the shares is affiliated with the trust immediately after the transaction. However, if the trust holds a share of the capital stock of the corporation at that time (that is, immediately after the transaction), the amount of the loss may be used to reduce the capital gain that could be realized or to increase the capital loss that could be sustained by the trust on a subsequent disposition of the share.
The adjusted cost base (ACB) of each share of the corporation that is held by the trust at that time is increased by an amount obtained by multiplying the amount of the loss by the ratio of the fair market value (FMV) of the share at that time to the FMV at that time of all the shares of the corporation held by the trust.
In the case of a succession, if the legal representative of the deceased elects, under federal legislation, to report a portion of the loss as a capital loss that the deceased sustains in the year of death, the rules described above apply only to the portion of the loss not covered by the election.
However, the amount entered on the deceased's return further to the election is limited, as applicable:
- to the amount of the capital loss calculated for Québec income tax purposes, or
- the amount entered on the deceased's federal return if the amount of the loss calculated for Québec income tax purposes is greater than the amount of the loss calculated for federal income tax purposes and the succession does not enter the maximum amount of the loss in the federal return.
For more information, see section 5.1.3 of the Guide to Filing the Trust Income Tax Return (TP-646.G-V).