Principal Issues: [TaxInterpretations translation] Can subsection 70(3) apply again on the death of the beneficiary of an estate or trust to whom the rights or things had been previously transferred upon the death of a taxpayer?
Position: No. Subsection 70(3) cannot be applied iteratively respecting property in the inventory of an artistic business. XXXXXXXXXX.
Reasons: The Income Tax Act.
XXXXXXXXXX 2011-039496
September 22, 2011
Dear Sir,
Subject: Rights or property transferred to beneficiaries
This is in response to your email dated February 4, 2011 in which you requested our opinion on the above subject.
Unless otherwise indicated, all statutory references herein are to the provisions of the Income Tax Act (the "Act").
You correctly indicated that the value of the property in the inventory of an artist’s artistic business may be considered to be nil because of an election made pursuant to subsection 10(6). Under paragraph 6 of Interpretation Bulletin IT-212R3, Income of Deceased Persons - Rights or Things, that inventory is a right or thing for the purposes of subsections 70(2) and 70(3).
Where subsection 70(3) applies to the transfer of a right or thing to a beneficiary of an estate or trust, you wish to know whether subsection 70(3) can apply again upon the death of the beneficiary.
Our Comments
As stated in paragraph 22 of Information Circular 70-6R5 of May 17, 2002, it is the practice of the Canada Revenue Agency not to issue a written opinion regarding proposed transactions otherwise than by advance rulings. Furthermore, when it comes to determining whether a completed transaction has received appropriate tax treatment, that determination is made first by our Tax Services Offices as a result of their review of all facts and documents, which is usually performed as part of an audit engagement. However, we can offer the following general comments that we hope may be helpful to you. These comments may, however, under certain circumstances, not apply to your particular situation.
If a taxpayer who has died had at the time of death rights or things (other than any capital property or any amount included in computing the taxpayer’s income by virtue of subsection (1)), the amount of which when realized or disposed of would have been included in computing the taxpayer’s income, the value of the rights or things at the time of death shall be included in computing the taxpayer’s income for the taxation year in which the taxpayer died.
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 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, 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.
By virtue of 70(2), the taxpayer's legal representative may elect to file a separate return that includes the value of the deceased's rights or things and pay the related tax for the taxation year in which the taxpayer died, just as if the taxpayer were another person. To be valid, that election must be made no later than the latest of the following dates: one year after the date of death; and 90 days after the sending of any notice of first assessment or reassessment for the year of death. If a separate return is filed, include the total value of all rights or things of the deceased, other than those transferred to a beneficiary(s) within the time prescribed in subsection 70(3).
If a right or thing has been transferred or distributed to a beneficiary or beneficiaries of the estate within one year from the date of death or within 90 days after the date of mailing of any notice of first assessment or reassessment for the year of death (whichever is later), subsection 70(3) applies and the tax liability is to be borne by the beneficiary or beneficiaries when the beneficiar(ies) convert(s) the right or thing into cash or dispose of it.
Where subsection 70(3) applied to a beneficiary in respect of inventory from the legatee's artistic business - which is a right or thing for purposes of subsection 70(2) - we do not believe that subsection 70(3) may apply again upon the death of that beneficiary.
In particular, for the property transferred to a beneficiary or beneficiaries to be rights or things pursuant to subsections 70(2) and (3), the election under subsection 10(6) must be made by the beneficiary or beneficiaries. In order for that election to be made, the property must be property in the inventory of the beneficiary or beneficiaries and, furthermore, property in the inventory of an artistic business of the beneficiary or beneficiaries. As you can appreciate, those conditions will generally not be satisfied.
We hope that the comments are of assistance.
Best regards,
François Bordeleau, Advocate
Manager
Business and Partnerships Section
Income Tax Rulings Directorate