12 June 2012 Roundtable, 2012-0442941C6 - STEP Roundtable – June 2012 - Question 4

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.

Principal Issues: (a) Whether subsection 70(1) is limited to the types of income specified therein, or does it apply generally to all items of income payable on a periodic basis? (b) Would a bonus which is habitually paid to an owner/manager constitute a bonus paid on a periodic basis? (c) Would interest paid on a guaranteed investment certificate or on a term deposit only once on maturity be considered to be paid on a periodic basis? (d) Does subsection 70(1) apply to undeclared dividends which are paid on a periodic basis?

Position: (a) The list in subsection 70(1) is not exhaustive; however, whether the provision applies to a particular item is a question of fact and law. (b) It is a question of fact whether a contractual obligation exists. (c) Yes (d) No

Reasons: (a) Subsection 70(1) includes the phrase ``other amount payable periodically``. (b) See paragraph 19.1 of IT-212R3 (c) Since interest accrues on a daily or other periodic basis, such interest is considered to be payable on a periodic basis even though it may not be due until maturity (d) Undeclared dividends would not be included in the deceased individual`s income under subsection 70(1). A shareholder is not entitled to a dividend until it is declared.

STEP CRA Roundtable – June 2012

QUESTION 4

Subsection 70(1) provides a rule whereby in the year of death certain sources of income are to be determined on an accrual basis. Typically, income from these sources would normally be determined on a cash basis in other circumstances. Subsection 70(1) lists certain types of income such as employment income, interest, rent, royalty income, etc., paid on a periodic basis.

We have several questions concerning this provision.

a) Firstly, is the rule limited to the types of income specified in subsection 70(1) or does the rule apply generally to all items of income paid on a periodic basis?

b) CRA has stated in a technical interpretation that the rule could apply with respect to a bonus payment (making the income reportable on the terminal tax return rather than a right or thing) where the bonus is paid on a periodic basis. For an ownermanager who typically takes a bonus within 180 days of the end of the taxation year, based on an estimate of the income for that taxation year, and does so habitually even though the amounts vary from year-to-year, does this constitute a bonus paid on a periodic basis?

c) Suppose interest is paid on a guaranteed investment certificate (GIC) or on a term deposit at maturity. Thus interest is only paid once during the term of the investment. In these circumstances, is the interest paid on a periodic basis such that the rule in subsection 70(1) would apply?

d) Can subsection 70(1) apply to dividends in respect of a share where dividends are paid on a periodic basis? (For example, a preferred share of a public corporation). Note that dividend income is not specifically listed in subsection 70(1).

CRA Response

a) The list in subsection 70(1) is not exhaustive as the provision includes the phrase "other amount payable periodically". However, whether subsection 70(1) applies to a particular item is a question of fact and law. As will be seen in our response to part d), other provisions of the Act must also be considered to determine whether the amount is included in income under subsection 70(1).

b) As indicated in paragraph 19.1 of IT-212R3:

Where… the employer has a contractual obligation to pay an annual bonus or on some other periodic basis, but the bonus had not been declared at the time of death, the amount is remuneration "payable periodically" as described in paragraph 70(1)(a).

Whether or not a contractual obligation exists in any specific situation is a question of fact. The fact that a bonus is paid habitually would not appear to offer any certainty that such an obligation exists.

The CRA's general position on shareholder manager remuneration is set out in Income Tax Technical News #22 and 30 wherein we stated:

We will not question the reasonableness of the payments as long as the salaries and bonuses are paid to managers who are shareholders of the CCPC (either directly or through a holding company), are Canadian residents, and are actively involved in the day-to-day operations of the company. The key is that the Canadian resident recipients must be active in the operating business and contribute to the income-producing activities from which the remuneration is paid.

Please note that as set out in document E2006-0168181E5, this general policy does not apply in situations such as that described above and we reserve the right to challenge the reasonability of the amount paid under section 67.

c) It is the CRA's position that since interest accrues on a daily or other periodic basis, such interest is considered to be payable on a periodic basis even though it may not be due until maturity. Therefore, at the date of death the value of all accrued and unpaid interest on a GIC or term deposit should generally be reported on the final return of the deceased pursuant to paragraph 70(1)(a).

d) Subsection 70(1) does not specifically refer to dividends; therefore, the issue is whether an anticipated yet undeclared dividend is an "other amount payable periodically". In our view, these undeclared dividends would not be included in the deceased individual's income under subsection 70(1).

Preferred shares may have a stated dividend expressed in dollars, as a dividend rate or some other basis. Nevertheless, a shareholder is not entitled to a dividend until it is declared, and must typically hold the share on the day before the ex-dividend date. Subsection 82(1) provides that dividends are included in the recipient's income when received. Section 121 allows a dividend tax credit based on the amount that is included in income under paragraph 82(1)(b). For tax purposes, a taxpayer is generally considered to have disposed of each of his properties upon death; accordingly, the deceased's estate would be required to include in its income dividends declared after the deceased individual's death.

William King
2012-044294