Principal Issues: Whether the unutilized Cumulative Canadian Development Expenditures [sic] (CCDE) of a deceased taxpayer can be deducted in computing the taxpayer's income for the taxation year of his/her death.
Position: No. A deduction in an amount not exceeding 30% of CCDE may be claimed in the year of death under subsection 66.2(2). No further deduction is allowed for the unclaimed balance.
Reasons: The Act and previous position.
2005-011143
XXXXXXXXXX Guy Goulet, CA, M. Fisc.
(613) 957-9768
February 7, 2005
Dear Sir,
Subject: Canadian development expenses of an individual
This is in response to your letter of January 10, 2005 requesting our comments regarding the tax treatment of an individual's Canadian development expense in the Particular Situation described below.
Unless otherwise indicated, all statutory references herein are to provisions of the Income Tax Act (the "Act").
Particular Situation:
The Particular Situation as you have presented it to us is as follows:
1. Mr. X was an individual residing in Canada.
2. Mr. X held an interest in a partnership (SENC).
3. SENC held shares of the capital stock of a Canadian-controlled private corporation (CCPC). Those shares were "flow-through shares" as defined in subsection 66(15).
4. In a particular taxation year, Opco incurred Canadian exploration expenses (CEE) and Canadian development expenses (CDE) and renounced to SENC CEE pursuant to subsection 66(12.6) and CDE pursuant to subsection 66(12.62). The presumptions in subsections 66(12.61) and 66(12.63) applied so that CEE and CDE were deemed to have been incurred by SENC.
5. At the end of its fiscal period in the particular taxation year, SENC allocated CEE and CDE deemed to have been incurred by it to its partners on a pro rata basis.
6. Mr. X deducted in computing his income for the particular taxation year, in accordance with subsections 66.1(3) and 66.2(2), all of his share of the CEE and an amount equal to 30% of his share of the CDE, so that at the beginning of the year following the particular year, Mr. X had a debit balance of cumulative Canadian development expense (CCDE), as defined in subsection 66.2(5).
7. Mr. X died in the year following the particular taxation year.
Your Questions
You wish to know if Mr. X’s entire CCDE debit balance can be deducted in Mr. X's income computation for the taxation year of his death. If not, you wish to know if that CCDE balance can be transferred to Mr. X's heirs.
Your Analysis
You are of the view that Mr. X would be entitled to a deduction of up to 30% of the undepreciated CCDE for the year of death pursuant to subsection 66.2(2) and that no further deduction would be allowed in respect of the unutilized balance.
You are also of the view that this unutilized balance would not be transferable to Mr X's beneficiaries.
Our Comments
It appears to us that the situation described in your letter may be an actual situation involving taxpayers. The Canada Revenue Agency ("CRA") does not generally provide written opinions on proposed transactions otherwise than by way of advance ruling. Furthermore, it is the responsibility of the relevant Tax Services Office to determine whether completed transactions have received appropriate tax treatment. We can, however, offer the following general comments which may not be fully applicable in a particular situation.
Subsection 66.2(2) sets out the amount that a taxpayer may deduct in computing income for a taxation year in respect of the taxpayer’s CCDE. It appears to us that in the particular situation, a deduction not exceeding 30% of the unamortized portion of Mr. X's CCDE could be claimed in computing his income for the taxation year of his death. No further deduction would be available in respect of the unamortized balance of the CCDE and the unutilized balance of the CCDE could not be transferred to Mr. X's estate.
Finally, subsection 70(5.2), which sets out the rules applicable where a taxpayer who owns a Canadian resource property dies in a taxation year, would not be applicable in the Particular Situation since it is our position that Mr. X's interest in SENC would not constitute a "Canadian resource property" as defined in subsection 66(15).
We hope that our comments are of assistance.
Best regards,
Maurice Bisson, CGA
for the Director
Corporate Reorganizations and Resource Industries Division
Income Tax Rulings Directorate
Policy and Planning Branch