ARCHIVED - Income of Deceased Persons - Rights or Things
DATE: March 21, 1990
SUBJECT: INCOME TAX ACT
Income of Deceased Persons - Rights or Things
REFERENCE: Subsection 70(2) (also subsections 10(6), 61.1(2), 69(1.1), 70(1), 70(3), 70(3.1), 70(4), 70(5.2), 96(1.5), 110.4(5), 159(5) and 159(5.1) and paragraphs 34(a) and 69(1)(c) of the Act and section 23 of the Income Tax Application Rules, 1971 (ITAR))
This bulletin replaces and cancels Interpretation Bulletin IT-212R2 dated June 29, 1987. Current revisions are designated by vertical lines.
The provisions of the Act discussed in this bulletin concern the tax treatment of "rights or things" that a taxpayer owns on death and that would have been included in income if the taxpayer had survived to realize or dispose of these properties. The amount of the rights or things that is brought into the income computation of the decedent for the year of death is the value of the rights or things at the time of death. Rights or things include, for example, dividends declared but unpaid, unused vacation leave credits and the inventory of a farmer who reports income on a cash basis. Rights or things do not include, for example, Canadian or foreign resource properties and the accrued portion of periodic payments. The legal representative of the decedent and the beneficiaries have three alternatives for reporting the income in respect of the decedent's rights or things. The alternatives are:
(a) the income can be reported in the decedent's income tax return for the year of death along with the other income for that period,
(b) the income can be reported in a separate income tax return for the rights or things of the decedent, or
(c) the rights or things can be transferred to one or more of the beneficiaries of the decedent with the result that the beneficiaries rather than the decedent report the income.
Discussion and Interpretation
1. "Rights or things", as the term is used in subsection 70(2), and their taxation are discussed in this bulletin. Subsection 70(1), which discusses payments received on a periodic basis, is discussed in the current version of IT-210 "Income of Deceased Persons - Periodic Payments".
2. With certain exceptions, where a taxpayer at the time of death had rights or things which, when realized or disposed of, would have been included in computing income, subsection 70(2) requires the "value" (see 4 below) of such rights or things at the date of death to be included in computing income for the year of death. Subsection 70(2) includes in income amounts that have been earned but have not been included in income: dividends declared but unpaid, deferred cash purchase tickets (see subsection 76(4)), uncashed matured bond coupons and amounts in respect of which an amount has been deducted in computing income, such as a "cash basis" inventory. Excluded from the application of subsection 70(2) are capital property, amounts included in income under subsection 70(1), and, pursuant to subsection 70(3.1), life insurance policies (including annuity contracts other than those in respect of which an amount was deductible by the decedent under paragraph 60(l)), eligible capital property, land included in the inventory of a business and Canadian or foreign resource properties.
3. Where there is genuine doubt about whether income earned before a taxpayer's death is a periodic payment or a right or thing, its treatment is generally resolved in favour of the taxpayer. As a consequence, the legal representative may report the income in question under subsection 70(1) or under subsection 70(2). In the latter case, depending upon the timing, an election under that provision may be made, or if the income has been transferred to beneficiaries, subsection 70(3) applies instead of subsection 70(2) (see 20 and 25 below).
4. The value of a right or thing for purposes of subsection 70(2) depends upon the facts of each particular situation. In calculating this "value", there may be deducted from the gross amount of the right or thing certain amounts incurred but unpaid at the date of the taxpayer's death. To be deductible for this purpose, those amounts must be of such a nature that, had the taxpayer not died, they would have been deductible in computing the taxpayer's income. For example, amounts payable or accrued for items such as interest, property taxes or insurance premiums are deductible if they are in respect of rights or things included in income under subsection 70(2).
5. Where deductions allowable according to the foregoing exceed the gross amount of the rights or things, the excess is deductible from other income of the taxpayer. Where the aggregate of deductions allowable in computing rights or things exceeds the aggregate of the gross amount of rights or things, no amount can be reported on the separate return for rights or things. In this situation the rights or things may be reported on the final return of the deceased taxpayer. See 20 below for further comments on the separate return for rights or things.
Supplies on Hand and Inventory
6. Supplies on hand and inventories of taxpayers on the cash basis of reporting income for tax purposes (farmers and fishermen) are rights or things. The inventory of an artist that is valued at nil pursuant to subsection 10(6) is a right or thing (see the current version of IT-504 "Visual Artists and Writers").
Work in Progress of Professionals
7. Work in progress of a professional, who is a sole proprietor and who elects to exclude work in progress in computing income pursuant to paragraph 34(a), is a right or thing. Paragraph 34(a) applies to the professional practice of an accountant, dentist, lawyer (including a notary in the province of Quebec), medical doctor, veterinarian or chiropractor. The treatment of work in progress of a professional partnership on the death of a partner or a retired partner is discussed in the current version of IT-278 "Death of a Partner or a Retired Partner".
8. Where a deceased farmer on the cash basis owned a "trading" herd, the value of the herd is a right or thing. If the herd includes a "basic" herd, the fair market value at December 31, 1971 of the basic herd at the time of death may be deducted from the value at date of death. See the current version of IT-427 "Livestock of Farmers" for further details.
9. The right to receive an interim or final payment for grain marketed through the Canadian Wheat Board is a right or thing. Where an announcement is made before a taxpayer's death that an interim or final payment will be made, the right or thing is to be valued at the amount fixed by the Canadian Wheat Board. Where an announcement of an interim or final payment is made after a taxpayer's death, the payment is considered to have no value for the purposes of subsection 70(2). Similarly an entitlement to receive a payment under the Western Grain Stabilization Act is a right or thing. Where it has been announced before a taxpayer's death that a Western Grain Stabilization payment will be made, the taxpayer's share of the payment is subject to the provisions of subsection 70(2). Where such announcements are made after the taxpayer's death, the taxpayer's share of such payments is not considered to have any value for the purposes of subsection 70(2).
10. The inventory of harvested grain of a deceased taxpayer who computed income using the cash basis is a right or thing. The value of the grain, for purposes of subsection 70(2), is considered to be not less than the open market feed grain prices less applicable deductions such as freight and elevator handling charges. See the current version of IT-234 "Income of Deceased Persons - Farm Crops" for comments on unharvested crops.
11. A right or thing may include a debt receivable. For example, a taxpayer has a debt receivable that is a right or thing where income is reported on the cash basis and an amount is owing to the taxpayer on the sale of livestock. Where such a debt is forgiven by the decedent by will, the debt is no less a right or thing but section 80 does not apply because of paragraph 80(1)(h).
12. A dividend which was declared but not paid before the taxpayer's death is a right or thing if the ex-dividend date, (or, if none, the date of record) was prior to the date of death. A dividend which is a right or thing is subject to the normal "gross up and credit" provisions.
13. Where an employee is entitled to be paid for unused vacation leave credits, the amounts thereof are rights or things which are brought into income under subsection 70(2).
Employee Compensation Plans
14. Where an employee has at the time of death a vested right to receive, though perhaps not immediately, additional compensation in respect of employment which is payable, in the event of death, to the estate or beneficiaries (but which had not accrued in the last pay period prior to death as contemplated in subsection 70(1)), the right to such payment is a right or thing. For instance, if under an employee benefit plan, certain amounts of compensation are payable on certain future dates to the employee or, in the event of death, to the employee's estate, the right to future payment at the time of death of the employee is a right or thing.
Lump-sum Payment out of a Pension Plan
15. Where a lump-sum payment out of a pension fund or plan in respect of a deceased employee's interest therein is made to an estate, trust or beneficiary (a recipient), no part of that amount is a right or thing within the meaning of subsection 70(2) in any case where the terms of the fund or plan were such that the employee could not have obtained a refund of contributions prior to death except in the event of retirement or other withdrawal from employment. This is by far the most usual situation, and where such is the case, the amount is income of the recipient pursuant to subparagraph 56(1)(a)(i). There may be exceptional cases where a pension fund or plan provides for voluntary withdrawal of contributions by an individual contributor (possibly with interest and/or employer's contributions) at a time or times other than on retirement or on leaving the employment. Where this is so, the portion of the lump-sum payment which would have been taxable had it been received by the decedent normally is still regarded as income of the estate or beneficiary; but if the executor desires, for any reason, to report that amount as income of the employee for the year of death pursuant to subsection 70(2), no objection will be made to that manner of reporting nor to any consequential election properly made under subsection 70(2).
Registered Retirement Savings Plans, etc.
16. A taxpayer is not considered to have a right or thing in respect of a registered retirement savings plan, whether matured or not, if the taxpayer was, until death, the annuitant thereunder. However, except in the case of a plan that had matured before June 30, 1978, where the annuitant dies after June 29, 1978, the fair market value of all the property of the plan at the time of death (less amounts receivable by the spouse of the decedent or received as a refund of premiums by an eligible child or grandchild of the decedent, as described in subsections 146(8.8) to (8.91)) must be included in the income of the decedent by virtue of subsection 146(8.8) in the ordinary return required to be filed by section 150. See the current version of IT-500 "Registered Retirement Savings Plans (maturing after June 29, 1978) Death of Annuitant after June 29, 1978" for further details. Similarly, a taxpayer is not considered to have a right or thing in respect of a registered retirement income fund.
17. Land that is included in the inventory of a business of the deceased taxpayer is not a right or thing for purposes of subsection 70(2). However, such land is deemed to be disposed of, immediately before death, by the deceased taxpayer for proceeds equal to fair market value, pursuant to paragraph 70(5.2)(e). Paragraph 70(5.2)(f) contains special rules where the land is transferred to the spouse or to a trust for the spouse.
Income-Averaging Annuity Contracts
18. On death, an income-averaging annuity contract is not a right or thing to which subsection 70(2) is applicable. Pursuant to subsection 61.1(2), any amount paid out of an income-averaging annuity contract subsequent to the death of the original annuitant is deemed to be a payment out of an income-averaging annuity contract and will therefore be included in the income of the recipient with no deduction for any capital element.
19. Section 23 of the ITAR provides rules for taxing "1971 receivables" of a business that is a profession. Any such receivables not already brought into income at the date of death are included in the decedent's final return pursuant to paragraph 23(3)(c) of the ITAR and a further deduction is precluded by paragraph 23(4)(a) of the ITAR. They are not considered to be rights or things under subsection 70(2). By virtue of subsection 159(5.1), the tax incurred on such receivables may be paid in instalments, as described in 24 below.
20. Pursuant to subsection 70(2) the taxpayer's legal representative may elect to file a separate return of the value of the decedent's rights or things and pay tax thereon for the taxation year in which the taxpayer died as if the taxpayer were another person. To be valid, the election must be made not later than the later of one year after the date of death and 90 days after the mailing of any notice of assessment or reassessment for the year of death. If a separate return is filed, it must include the total value of all the decedent's rights or things other than those transferred to beneficiaries within the time provided by subsection 70(3) (see 25 below). For 1988 and subsequent taxation years, the personal tax credits provided in paragraphs 118(1)(a) to (d) and subsection 118(2) that apply to the decedent's ordinary income tax return for the year of death may also be claimed on the separate return filed pursuant to subsection 70(2). The personal tax credits are the married tax credit, the married equivalent tax credit, the basic personal tax credit, the dependant tax credit and the age tax credit. See the current version of IT-513 "Personal Tax Credits". The extent to which deductions under section 110 and tax credits under subsection 118(3) and sections 118.1 to 118.7 and 118.9 may be claimed on the separate return is discussed in IT-326R2 "Returns of Deceased Persons as 'Another Person'". (Prior to 1988, the personal exemptions provided by paragraphs 109(1)(a) to (h) that applied to the decedent's ordinary return for the year of death could also be claimed on the separate return filed pursuant to subsection 70(2). The extent to which deductions under sections 110, 110.1 and 110.2 could be claimed on the separate return is discussed in IT-326R.)
21. Pursuant to subsection 70(4), an election made under subsection 70(2) may be revoked if the notice of revocation is in writing, signed by the decedent's legal representative and filed within the time for making the election.
22. Pursuant to subsection 110.4(5), the forward averaged amount brought into income pursuant to subsection 110.4(2) cannot be reported in the separate return filed under subsection 70(2).
23. A sale of a right or thing for good and valuable consideration does not come within the meaning of the phrase "transferred or distributed" as used in subsection 70(3).
Payment of Tax in Instalments
24. The additional tax payable by virtue of subsection 70(2) may be paid in up to ten equal consecutive annual instalments when the conditions in subsection 159(5) are met. See T2075 "Election under subsection 159(5) by a deceased taxpayer's legal representative to defer payments of income tax".
Recipients of Rights or Things
25. Where an estate, trust or beneficiary (the recipient) acquires a right or thing upon a taxpayer's death, the tax consequences arising therefrom will depend on whether the value of that right or thing was included in the income of the deceased taxpayer's income tax return under subsection 70(2) or in the deceased taxpayer's income tax return for the year of death or in the hands of the recipient under subsection 70(3).
(a) Where subsection 70(2) applies or the rights or things are included in the deceased taxpayer's income tax return for the year of death, the recipient is deemed by paragraph 69(1)(c) to have acquired the asset at a cost equal to its fair market value. The fair market value is normally the gross amount (see 4 above) used in computing the income of the decedent. The disposition of the asset by the recipient will generally be on capital account unless the recipient's activities in relation to the asset are such that the asset constitutes a trading asset.
(b) Where a right or thing has been transferred or distributed to beneficiaries of the estate not later than one year after the date of death or 90 days after the date of mailing of any notice of assessment or reassessment in respect of the year of death, whichever is the later date, subsection 70(3) applies. Where subsection 70(3) applies, the disposition is always on income account and the tax liability arises when the beneficiary realizes or disposes of the asset. In addition where subsection 70(3) applies, paragraph 69(1)(c) does not apply with the result that the recipient's cost is determined under subsection 69(1.1) as the aggregate of such part of the cost of the property to the deceased as was not deducted in computing the income of the deceased for any taxation year and any expenditures made or incurred by the recipient to acquire the property.
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