15 October 1996 Internal T.I. 9628237 - RIGHTS OR THINGS RETURN

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.

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the Department.

Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle du ministère.

Principales Questions:

Is it possible to claim an ITC on a Rights or Things return.

Position Adoptée:

no

Raisons POUR POSITION ADOPTÉE:

Technical Notes. Previous IT-331R paragraph 39 (although repealed by IDT-3 on September 26, 1994) and ccm file a-0123 dated November 17, 1984.

								October 15, 1996

	Regina Tax Services Office		Head Office
	Estates & Trusts				Income Tax Rulings and
								  Interpretations
								    Directorate
	Attention: Mr. Gord Rubin		J. Desparois
(613) 957-8953

								7-962823

ESTATE OF XXXXXXXXXX

Further to our telephone conversation (Murphy/Rubin) of August 12, 1996, we are providing comments on the interaction between subsections 70(2) and 127(5) of the Income Tax Act (the "Act"). On July 12, 1996, the Regina Tax Services Office wrote to the representative of the above mentioned estate, XXXXXXXXXX and explained that a deduction under subsection 127(5) of the Act cannot be claimed in a Rights or Things return. On July 24, 1996 XXXXXXXXXX requested a ruling concerning the possibility of claiming the investment tax credit (the "ITC") on the Rights or Things return. We have informed XXXXXXXXXX that the Department cannot provide any ruling as the XXXXXXXXXX has already been reassessed and the ITC disallowed. However, we have mentioned to XXXXXXXXXX that we will consider his request and that we will provide our interpretation to the Regina Tax Services Office who will then contact him directly.

XXXXXXXXXX opinion

XXXXXXXXXX is of the opinion that an ITC can be claimed on the Rights or Things return for the following reasons:

"IT-326R2, paragraph 2 of the summary on page one states that "any other available tax credits as well as the deductions otherwise allowable in calculating taxable income are deductible in the separate returns or in the ordinary return". The same IT Bulletin describes credits not allowed under point 9 and specifically refers to "refundable" tax credits, which we do not disagree with.

Since 127(5) refers to the deductibility of tax credits "from the tax otherwise payable by a taxpayer under this part", and that the calculation of tax under subsection 70(2) is in accordance with Part 1, combined with the comments in IT-326R2, we believe the intention of the legislation is to allow unused investment tax credits on a "Rights and Things" return."

Our comments

Subsection 70(2) of the Act provides for an election by the legal representative of a deceased taxpayer to file a separate return in respect of Rights or Things receivable at the date of death. Subsection 70(2) requires that the separate return of income be filed as if

"(a)the taxpayer were another person;

(b)that other person's only income for the year were the value of the rights or things; and
(c)subject to sections 114.2 and 118.93, that other person were entitled to the deductions to which the taxpayer was entitled under sections 110, 118 to 118.7 and 118.9 for the year in computing the taxpayer's taxable income or tax payable under this Part, as the case may be, for the year."

Paragraph 70(2)(c) of the Act specifically provides which deductions and tax credits can be claimed on the separate return. It is our opinion that without paragraph 70(2)(c) of the Act, no deductions nor tax credits could be claimed on the Rights or Things return. In fact, if the "other person" referred to in paragraph 70(2)(a) of the Act could claim, in the separate return or in the "ordinary" return, any other deductions and tax credits available in calculating taxable income, it is our opinion that the legislator would not have needed to draft paragraph 70(2)(c) of the Act. In this regard, the Technical Notes to subsection 70(2) of the Act issued by the Department of Finance in September 1985 provides the following comments:

"Under the existing law, the only deductions from income permitted in determining taxable income on that separate return are those deductions allowed for personal exemptions under section 109. However, on an administrative basis, certain other deductions are permitted in computing taxable income for purposes of the separate return. This amendment to subsection 70(2) expressly allows the deduction in the separate return for such things as medical expenses, charitable donations and the $1,000 investment and pension income exclusions under sections 110 to 110.2."

At that time, paragraph 70(2)(c) of the Act was enacted as follows:

"subject to section 114.2, that other person were entitled to the deductions to which the taxpayer was entitled under sections 109 to 110.2 for the year in computing his taxable income for the year."

In 1988, paragraph 70(2)(c) was amended to remove the reference to the personal tax exemptions and certain other deductions and to include references to the new personal tax credit provisions, as a consequence of the conversion of such exemptions and deductions to tax credits. Therefore, it is our opinion that an ITC cannot be claimed on the Rights or Things return since paragraph 70(2)(c) of the Act does not refer to subsection 127(5) of the Act. In other words, the only deductions and tax credits available on the Rights or Things return are those specified in paragraph 70(2)(c) of the Act.

XXXXXXXXXX has mentioned that Interpretation Bulletin IT-326R2 states, in the paragraph entitled Summary, that "any other available tax credits as well as the deductions otherwise allowable in calculating taxable income are deductible in the separate returns or in the ordinary return". Based on that statement, he has assumed that the ITC could be claimed on the separate return or in the ordinary return. In addition, he has added that under the section entitled Credits and Deductions Not Allowed in IT-326R2, there was no reference to the ITC. XXXXXXXXXX has omitted to mention that the section entitled Credits and Deductions Allowed specifically comments on all the deductions and credits listed in paragraph 70(2)(c) of the Act. There is no reference to any other credits or deductions. In addition, the section entitled Credits and Deductions Not Allowed provides examples of credits and deductions which cannot be claimed in a separate return. The fact that a credit or a deduction is not listed in that section of IT-326R2 does not render such a credit or a deduction available under the separate return. Therefore, we believe that IT-326R2 does not mislead taxpayers to conclude that ITCs could be claimed on the Rights or Things return.

In addition, we would like to bring to your attention that paragraph 127.1(1)(a) of the Act specifically provides that refundable investment tax credits cannot be claimed on a separate return filed under subsection 70(2) of the Act. It is our opinion that the reference to subsection 70(2) of the Act contained in the preamble to paragraph 127.1(1)(a) of the Act was made for greater certainty. In fact, this reference was not required as paragraph 70(2)(c) of the Act does not specifically refer to section 127.1 of the Act. It is also our opinion that the fact that the legislator did not make the reference to subsection 70(2) in subsection 127(5), does not lead one to conclude that the ITC can be claimed on a Rights or Things return.

In conclusion, it is our opinion that you should maintain the assessment by disallowing any ITC claimed on the Rights or Things return.

If you have further questions or wish to discuss any of the above, please contact the writer.

Marc Vanasse
Acting Section Chief
Resources, Partnerships and
Trusts Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch