# Could/Would CRA dispute a capital loss based on appraised FMV?



## Userkare (Nov 17, 2014)

Let's say that you had a house (as part of an estate) appraised by a professional AACI certified appraiser - as opposed to just a R/E agent's "opinion". You use that value to pay the Estate Administration Tax. Six months later, the house is sold for significantly less than that appraisal; 22% less to be exact. When it comes time to file the estate income tax return, and that capital loss is used to offset or eliminate any other capital gains, could CRA reject the appraised FMV?

This has not happened yet... but I've been told by both a lawyer and an accountant that it was a possibility. What the heck would trigger such an action? Toronto R/E prices have been a roller-coaster this past year, and there are always personal situations that affect one's decision to sell now at a lower price rather than to risk future uncertainty. 

On the flip side, if someone made a 'killing' with the value of a house skyrocketing over a short period, could they, or CRA set aside the appraised FMV to pay less capital gain?


I always thought that a properly done FMV appraisal was the last word. No?


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## Nerd Investor (Nov 3, 2015)

Before worrying too much about it, was the property in question a rental property / business asset? Because if it was personal use property, unfortunately you can't use the capital loss to offsest capital gains anyway. 

As for the value, I would think the actual sale price is more concrete evidence than an appraisal (which at the end of the day is an estimate, no matter how good the appraiser). For CRA to push for the appraised value, they would have to argue the value actually decreased 22% in 6 months. I think you'd have a pretty good case if you had to fight them on it.


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## twa2w (Mar 5, 2016)

Agree with Nerd investor.
If the estate, on the deceased's final tax return, paid capital gains tax on the property between the original purchase price and the appraised value then I seeno reason why the estate could not then claim a loss on the actual sale providing use of property did not change.
The estate admin tax does not come into play in anyway, other than you may be able to file a revision and get some money back. Probate fees and CRA are not related in anyway.
If the estate did not file and pay a capital gain based on the final tax return, then any capital gains is based on original purchase price. This assumes the property qualifies.


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## Userkare (Nov 17, 2014)

My understanding is that, upon death, the property ( principal residence ) is "deemed to have been sold" to the estate at a Fair Market Value. The deceased individual does not have to claim a capital gain for that deemed sale on the final income tax return. 

When the estate disposes of the property, it may realize a capital gain if it sold for more than the FMV and pay the taxes, or a capital loss if not. According to the accountant, at a reputable firm, that loss can be used to offset any other capital gain the estate may have.

Explained well here... http://mti-cpa.com/deceaseds-principal-residence-but-i-thought-it-wasnt-taxable/

The Estate Admin Tax surely has nothing to do with CRA; but I don't think it would be legal, or ethical to use a lower FMV to avoid Estate Tax, and then use a different higher FMV in order to generate a capital loss on the estate income tax return. As long as the same number is used for both, everything looks aboveboard.


But... That's not my question.:fatigue: I'm curious if anyone has experienced CRA denying a Capital Loss by claiming the assessed Fair Market Value was wrong to begin with - just because they say so - even if it was done by a paid professional appraiser.


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## Nerd Investor (Nov 3, 2015)

I think they may be mistaken. I was a reputable accountant (at least I like to think so!) and thought the same thing at one point (re: claiming the loss) but I was mistaken. Honestly you see it so rarely it's the kind of thing that can creep up on you, even if you're excellent at what you do. This is the link to the Folio that she references in the article you posted:
https://www.canada.ca/en/revenue-ag...olio-s1-f3-c2-principal-residence.html#N10664

Check out "Loss on the disposition of a residence" 2.31

Also check out this link on personal use property: https://www.canada.ca/en/revenue-ag...se-property/personal-use-property-losses.html

Now, I haven't been practicing for a bit, so maybe there is a mechanism specifically for estate returns to use losses on personal property that I'm not aware of.
Anyway, I know this isn't what your asking but if the information I posted is correct then your question kind of becomes moot as the loss would not be usable anyway.


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## Userkare (Nov 17, 2014)

Thanks for the info.

I was never an accountant, so all of this is legal mumbo-jumbo to me. That's why I'm paying for an accountant from a national accounting firm that specializes in corporate and trust taxes. If they say I can use a capital loss from the sale of a house to offset other capital gains - and perhaps even carry-back the loss to the deceased's final T1 return I'll go with what they say.

Perhaps the rules of property are different for a trust. The trust T3 return doesn't even get a 'personal exemption' to reduce taxes. Also, the house has been vacant since the date of death, so it's not a principal residence of anybody. As such it's subject to a capital gain; why not then a capital loss? Contrary to common mis-held belief, CRA is usually fair in this regard.

As for CRA rejecting the FMV... I think that they would do this if there was some evidence that the appraiser and/or the buyer was not "at arm's length" with the seller. i.e. somebody trying to scam the gov't out of the taxes. That is not the case for me.


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## twa2w (Mar 5, 2016)

I found answers for both sides of this question. 
Obviously on the deceased tax return, to date of death, the disposition of the property to the estate will have to be declared.
From that point I see comments stating both a gain or loss would have to taken on any change in value as per this article
http://mti-cpa.com/deceaseds-principal-residence-but-i-thought-it-wasnt-taxable/
On the other hand, the CRA website says this 
"Disposition of estate property by the legal representative
As the legal representative, you may continue looking after the deceased's estate through a trust. If you dispose of capital property, the result may be a net capital loss. If you dispose of depreciable property, the result may be a terminal loss.

Usually, you would claim these losses on the trust's T3 Trust Income Tax and Information Return. However, in the first tax year of a deceased person's graduated rate estate, you can elect to treat all or part of these losses as losses of the deceased on the deceased's final return. A net capital loss realized in this first tax year cannot be applied to any tax year before the year of death. For more information, see "164(6) election" in Chapter 3 of the T4013, T3 Trust Guide."

So is the property a capital property, a depreciable property or a personal use property?

I think your situation is unusual in that historically house prices have risen or stayed in line with value at death. I would suggest that posters here, and accountants, would have little in the way of precedents. Although I suspect this may change given your situation may become more common.

I would take the advice of your accountant, make the claim, but not distribute any funds until you have a tax clearance certificate. Even then I might hold back enough to cover any taxes that might arise in the case of an unfavourable last minute change by CRA.

I don't think there is any question CRA will accept the appraisal. I think the question is whether they will allow the loss based on how they class the property.

Best of luck and please keep this thread informed as to any decision. Helps with collective wisdom and for future inquiries.


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## Userkare (Nov 17, 2014)

twa2w said:


> I think your situation is unusual in that historically house prices have risen or stayed in line with value at death. I would suggest that posters here, and accountants, would have little in the way of precedents. Although I suspect this may change given your situation may become more common.
> 
> I would take the advice of your accountant, make the claim, but not distribute any funds until you have a tax clearance certificate. Even then I might hold back enough to cover any taxes that might arise in the case of an unfavourable last minute change by CRA.
> 
> ...


The house was appraised in Toronto from data near the top of the April/May bump; it sold in late December near the bottom of the slump. ( https://www.zolo.ca/toronto-real-estate/trends ). This particular house, I would say, is below average in every way; it's lopsided, and the appraiser said it would be hard to sell, but maybe only as a tear-down. So, although the estate trustee is supposed to get the best possible price, the beneficiaries can request that it be sold at whatever price they're happy with - as long as all the transactions were arms-length.

As for the tax clearance certificate, here's the thing... It only protects the estate trustee from further CRA action; they can still go after the beneficiaries for any additional assessed taxes at a later date. When the sole beneficiary is the spouse of the estate trustee, then there's no real benefit to requesting the clearance certificate. But yes, if not hold back enough to pay any possible taxes if the capital loss is disallowed, then at least make sure that the beneficiary keeps enough of it accessible if needed.

Since a house is one of the most common assets that an estate is left to dispose of, I would hope that qualified accountants are aware of the CRA class they belong in.


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