14 May 2002 External T.I. 2001-0097785 - Deduction & Tax cr. on optional 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 CCRA.

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

Principal Issues: Deductions available on optional returns under 70(2), 104(23)(d) & 150(4)

1. Based on comments in T4011 which permit carrying charges, contributions to RRSP, RPP, union dues and other employment expenses on the return to which the income relates, why are ABIL, exploration & development, moving expenses not similarly permitted to be claimed on any of the optional returns?

2. Why is the caregiver tax credit under 118(1)(c.1) not allowed on optional returns when it is provided for in the legislation?

Position: 1. An RRSP deduction, like deductions for an ABIL, exploration & development, moving expenses, can only be claimed on the final return. While certain deductions in computing net income, such as carrying charges, contributions to an RPP, union dues and other employment expenses, are deductible on the optional return which includes the income to which the deduction can reasonably be considered to be wholly applicable, such deductions would normally be wholly applicable to the income reported on the final return.

2. 118(1)(c.1) credit is allowed on both final and optional returns.

Reasons: 1. As stated in 4(1), the deductions in computing net income, such as carrying charges, contributions to RPP, union dues and other employment expenses, are deductible in computing the income to which the amounts can reasonably be considered as wholly applicable to that source subject to subsection 4(2). Moving expenses and contributions to RRSPs are not deductible on the optional return because of 4(2). An ABIL, as a type of capital loss, cannot be claimed on the optional return. Exploration and development expenses are added to a taxpayer's pools and there is no provision to transfer the pools to the optional returns.

2. Position was likely added to 1989 version of T4011 before the legislation on 118(1)(c.1) was finalized

XXXXXXXXXX 	2001-009778
		Annemarie Humenuk
Attention:  XXXXXXXXXX 

May 14, 2002

Dear XXXXXXXXXX:

Re: Deductions Available in Respect of a Rights and Things Return

This is in reply to your letter of August 16, 2001 in which you ask for clarification of certain comments found in the 2000 version of T4011, Preparing Returns for Deceased Taxpayers (the "Guide"), related to the deductions permitted in computing the income to be reported on the optional returns. We apologize for the delay in our response.

All statutory references in this memorandum are references to the provisions of the Income Tax Act, R.S.C. 1985 (5th supp.) c. 1, as amended.

As you noted, various opinions issued by this Directorate state that the only deductions permitted in computing the income for a return filed under any of subsections 70(2), 104(23) or 150(4) are those specified in paragraphs 70(2)(c), 104(23)(d) and 150(4)(d) respectively. However, you note that some of the deductions described on page 16 of the Guide appear inconsistent with this view. In particular, you note that the Guide states that certain deductions in computing net income, such as carrying charges, contributions to a registered pension plan, contributions to a registered retirement savings plan, union dues and other employment expenses, may be claimed on the return which includes the income to which the deduction relates. In addition, you note that the Guide states that the caregiver tax credit described in paragraph 118(1)(c.1) cannot be claimed on any of the optional returns despite the fact that each of paragraphs 70(2)(c), 104(23)(d) and 150(4)(d) expressly permit such a deduction.

Each of the provisions which permit the filing of a separate return on an elective basis indicates that the legal representative may file a separate return of income under Part I of the Act as if the taxpayer were "another person" and that person's only income for the year was the income described therein. In other words, the income tax return reporting the income of the deceased from January 1 of the year of death to the date of death (referred to in this letter as the "final return") and the separate returns filed under these provisions are treated as being filed by separate taxpayers. Except as expressly permitted by these provisions, that "other person" cannot claim any deduction in computing income or tax payable based on the availability of such a deduction to the deceased taxpayer.

The general rules for limiting deductions in computing net income to income from a particular source are contained in sections 3 and 4 of the Act. In particular, paragraph 4(1)(a) limits the amount deductible in computing income from a particular source or sources to the amount that can reasonably be regarded as wholly applicable to that source in a particular place. Where a deduction is partly applicable to one source and partly applicable to another source, the amount deductible in computing the income from either source is limited to the portion of the amount that can reasonably be regarded as applicable to that source. As a result, except as provided by subsection 4(2), deductible expenses incurred in earning income from a particular source are deductible in computing the net income from that source, regardless of whether such income is reported on the final return or an optional return.

In order for a particular amount to be deductible in computing the net income reported on an optional return, the amount must reasonably be regarded as wholly applicable to that source. In most cases, the deductions listed in the Guide under the category of "Amounts you can claim only against certain income" will be either wholly or predominantly applicable to the income reported on the final return. However, to the extent that all or part of such amounts can reasonably be considered applicable to the income reported on an optional return, such amounts are deductible in computing the income from that source. In our view, carrying charges incurred in earning income from business or property, contributions to a registered pension plan, union dues and other employment expenses would normally be wholly applicable to the income reported on the final return.

With respect to an RRSP deduction, subsection 4(2) provides that the amounts deductible under any of sections 60 to 64 are not considered to be wholly or partly applicable to any particular source. As a result, the Guide is incorrect in suggesting that an RRSP deduction can be claimed on an optional return. However, the position set out in the Guide with respect to deductions for moving expenses and other deductions from income listed in the Guide as not being deductible in computing the income to be reported on an optional return is correct because of the limitation in subsection 4(2).

Paragraphs 15-18 of IT-125R4, Dispositions of Resource Properties, discuss the deemed dispositions of any resource property held by a taxpayer at the time of death. The amount of any resulting income inclusion is not a right or thing by reason of subsection 70(3.1) and cannot be included in the income reported on a return filed under subsection 70(2). As stated in IT-125R4, the amount of any deduction in respect of the taxpayer's pool of available exploration and development expenses in excess of those deemed proceeds of disposition may be claimed on the final return to the extent permitted by the relevant provisions of the Act. There is no provision in the Act which would permit the deceased taxpayer's pool of available exploration and development expenses to be claimed on any other return.

As stated in IT-484R2, Business Investment Losses, a business investment loss is a type of capital loss, the allowable portion of which is deductible in computing net income. As there is no transaction that could give rise to the reporting of a capital loss or a business investment loss on an optional return, any business investment loss realized in the year of death may only be claimed on the final return. To the extent that any allowable business investment loss so incurred cannot be deducted in computing the income reported on the final return, the loss would form part of the deceased taxpayer's non-capital loss for that year as determined under subsection 111(8).

We have reconsidered our position with respect to the caregiver tax credit described in paragraph 118(1)(c.1) and we agree that this tax credit may be claimed on any of the optional returns described in subsections 70(2), 104(23) and 150(4).

As noted in your letter, the deductions specified in each of paragraphs 70(2)(c), 104(23)(d) and 150(4)(d) are deductible on the final return and the optional returns subject to the limitations in sections 114.2 and 118.93.

We have advised the Directorate responsible for publishing the Guide of our views on the issues raised in your letter. Your comments and our reply will be taken into consideration in the preparation of future versions of the Guide.

T. Murphy
for Director
International and Trusts Division
Income Tax Rulings Directorate

c.c.: Wendy Coderre
Partnerships Information Returns, Capital Gains, Deceased & RCA
Specialty Publications Section
Client Services Directorate