After noting that the inventory of an artist that is valued at nil pursuant to s. 10(6) is a right or thing, CRA indicated that, subject to s. 70(3), the value of the inventory is included in the deceased’s terminal return unless the legal representative elects under s. 70(2) to file a separate return for the year of death. Where s. 70(3) does not apply, the person acquiring the inventory on death is deemed by s. 69(1)(c) to have acquired it at its fair market value, and any subsequent disposition of that inventory generally will be on capital account.
Where s. 70(3) applies, the value of the deceased's rights or property will instead be included in computing the income of the beneficiary for the taxation year in which the beneficiary received it, and the beneficiary’s cost will be determined under s. 69(1.1) to equal the total of the part of the cost thereof to the deceased as had not been deducted by the deceased in computing the deceased’s income for any year, and any expenditures made or incurred by the beneficiary to acquire the property – which cost will be used to compute the beneficiary's income when the inventory is sold. If s. 70(3) applies, the sale of the inventory by the beneficiary will be treated as an income transaction.