Principal Issues: [TaxInterpretations translation]
Could the deceased taxpayer deduct an amount in respect of his provision for income as at XXXXXXXXXX in his final return and did the legal representative have to file a supplementary income tax return to include the amount deducted in his final return?
Position:
In this situation, yes.
Reasons:
The conditions for the application of subsection 34.2(8) of the Act are satisfied. Since subsection 34.2(8) applies to the computation of the taxpayer's business income, the legal representative must file an additional return of income pursuant to subsection 150(4) since one of the facts mentioned in that subsection is true.
June 29, 2000
Shawinigan-Sud Tax Centre Headquarters Appeals Division Sylvie Labarre, CA 4695 - 12th Avenue, CP 3000 (613) 957-8953 Shawinigan-Sud QC G9N 7S6
Christian Gélinas, Chief of Appeals 2000-002806
XXXXXXXXXX
This is in response to your memo of May 15, 2000 regarding the deduction of a reserve on the regular final return of a deceased taxpayer and the filing of a supplementary income tax return by the deceased’s legal representative.
XXXXXXXXXX died on XXXXXXXXXX. At the time of death, the taxpayer was a member of a partnership with a fiscal period ending on XXXXXXXXXX.
According to the T1139 filed with the final return for XXXXXXXXXX, the legal representative added to the taxpayer's business income, pursuant to subsection 34.2(5) of the Income Tax Act (the “Act”), the amount deducted in XXXXXXXXXX as a reserve for income as at XXXXXXXXXX, i.e., $XXXXXXXXXX.
According to the T1139 filed with the final return for XXXXXXXXXX, the legal representative deducted an amount of $XXXXXXXXXX from the taxpayer's business income. The legal representative also filed a supplementary income tax return pursuant to subsection 150(4) in which he included income of $XXXXXXXXXX.
You asked whether the deduction of $XXXXXXXXXX in the final return was permitted and whether the legal representative could file a supplementary income tax return to include that amount.
Our Comments
Subsection 34.2(8) allows a deceased individual, under certain conditions, to benefit from a deduction in the individual’s final return of up to the amount of the reserve the individual could have benefited from under 34.2(4) had he been alive.
One of the conditions for an individual who dies in the year to benefit from that deduction is that an amount is included under subsection 34.2(5) in computing the individual's income for the year from the business. As stated in the facts, this condition would be satisfied since an amount of $XXXXXXXXXX was included as such according to the T1139 filed with the taxpayer's final return.
The last condition is that the legal representative either elects to deduct an amount under subsection 34.2(8) or files a separate return of income under subsection 150(4). The latter condition is also satisfied.
The amount that the deceased taxpayer may deduct under subsection 34.2(8) is the lesser of the amount deducted by the legal representative, i.e. $XXXXXXXXXX, and the amount that would have been deductible under subsection 34.2(4) by the taxpayer had he not died, i.e. XXXXXXXXXX% * $XXXXXXXXXX (income as at XXXXXXXXXX).
Consequently, the Canada Customs and Revenue Agency should accept the amount of $XXXXXXXXXX that was deducted from the taxpayer's business income pursuant to subsection 34.2(8).
Subsection 150(4) does not apply only where an individual dies after the end of a fiscal period of the business ending in the year and another fiscal period of the business ends because of the death of the individual. For the 1996 and subsequent taxation years, subsection 150(4) was amended to add the situation where subsection 34.1(9) or 34.2(8) applies in computing an individual's income from a business.
We agree with your opinion that, in this situation, subsection 34.1(9) does not apply since the taxpayer did not use the alternative method for the fiscal period ending on XXXXXXXXXX.
On the other hand, in the present situation, subsection 150(4) would apply since subsection 34.2(8) applied to the computation of the taxpayer's income. Consequently, the taxpayer's legal representative had to file an additional income tax return for XXXXXXXXXX as if the return were filed for another person and had to pay the tax for which that other person was liable for the year calculated as if the other person's only income were $XXXXXXXXXX. That is the amount determined for B in the formula in paragraph 150(4)(c), i.e., the amount deducted under subsection 34.2(8) in computing the taxpayer's income. A and C of the formula are nil.
We hope you find these comments helpful. Should you require additional information regarding the content of this document, please do not hesitate to contact us.
Marc Vanasse, CA
for the Director
Resources, Partnerships and Trusts Division
Income Tax Rulings and
Interpretation Directorate
Policy and Legislation Branch