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 right to receive an amount payable was transferred to the spouse as a consequence of the death of a taxpayer and an election has been jointly filed by the spouse and the taxpayer's legal representative pursuant to subsection 72(2) of the Act. During the previous years, the taxpayer has claimed a reserve pursuant to subparagraph 40(1)(a)(iii) of the Act. In the year of death, the taxpayer claimed a reserve pursuant to paragraph 72(2)(b) of the Act. What are the tax consequences for the spouse?
Position: The spouse will have to consider as a gain determined under subparagraph 40(1)(a)(i) the equivalent to the amount of the reserve claimed by the deceased in the year of death. However, the spouse may claim a reserve pursuant to subparagraph 40(1)(a)(iii) using the assumptions provided for in paragraph 72(2)(c) of the Act. In the year of death, the spouse may claim the same amount of reserve as the deceased claimed.
Reasons: Dispositions of paragraphs 72(2)(b) and (c) of the Act and of subparagraph 40(1)(a)(iii) of the Act.
January 23, 2007
John L. Pereira HEADQUARTERS
Clearances, 442-3-9 Income Tax Rulings
Toronto North Tax Services Office Directorate
5001 Yonge St. Sylvie Labarre
Toronto ON M2N 6R9 (613) 957-8953
2006-021734
Death of a taxpayer - Reserves
We are writing in response to your memorandum of November 29, 2006 in which you requested our views on the application of subsection 72(2) of the Income Tax Act (the "Act") in the following situation.
Mr. XXXXXXXXXX sold a capital property in XXXXXXXXXX that resulted in a gain of $XXXXXXXXXX and sold a capital property in XXXXXXXXXX that resulted in a gain of $XXXXXXXXXX. The proceeds of these dispositions were not entirely paid and Mr. XXXXXXXXXX had the right to claim a reserve pursuant to subparagraph 40(1)(a)(iii) of the Act. Mr. XXXXXXXXXX claimed such a reserve in XXXXXXXXXX.
Mr. XXXXXXXXXX died on XXXXXXXXXX. At the date of death, Mr. XXXXXXXXXX still had a right to receive an amount payable in respect of these two dispositions. That right was transferred to his spouse, Mrs. XXXXXXXXXX. Mr. and Mrs. XXXXXXXXXX were residents in Canada immediately prior to the taxpayer's death. Mrs. XXXXXXXXXX and the legal representative of Mr. XXXXXXXXXX had jointly filed an election for the property pursuant to subsection 72(2) of the Act.
Pursuant to paragraph 72(2)(b) of the Act, reserves of $XXXXXXXXXX and of $XXXXXXXXXX in respect of the XXXXXXXXXX and XXXXXXXXXX dispositions were claimed in the XXXXXXXXXX income tax return of Mr. XXXXXXXXXX.
You are requesting our views on the tax consequences for Mrs. XXXXXXXXXX relatively to the reserves claimed by Mr. XXXXXXXXXX in his last income tax return when an election pursuant to subsection 72(2) of the Act was jointly filed by Mrs. XXXXXXXXXX and the legal representative of Mr. XXXXXXXXXX.
Pursuant to paragraph 72(2)(b) of the Act, the amount of the reserves claimed by Mr. XXXXXXXXXX in his XXXXXXXXXX income tax return is deemed to have been proceeds of disposition of a capital property disposed of by Mrs. XXXXXXXXXX in Mrs. XXXXXXXXXX's first taxation year ending after the death of Mr. XXXXXXXXXX and the amount of the gain on the disposition determined under subparagraph 40(1)(a)(i) of the Act. Therefore, pursuant to paragraph 72(2)(b) of the Act, Mrs. XXXXXXXXXX would have to include an amount of $XXXXXXXXXX in the computation of her capital gain of XXXXXXXXXX as the gain determined before the deduction of any reserve. However, Mrs. XXXXXXXXXX may claim reserves pursuant to subparagraph 40(1)(a)(iii) of the Act taking into account the assumptions provided for in paragraph 72(2)(c) of the Act.
In the present situation, Mrs. XXXXXXXXXX would have to compute the reserves that she may claim pursuant to subparagraph 40(1)(a)(iii) of the Act as if she had disposed, in XXXXXXXXXX, of the property Mr. XXXXXXXXXX disposed of in XXXXXXXXXX and as if she had disposed, in XXXXXXXXXX, of the property Mr. XXXXXXXXXX disposed of in XXXXXXXXXX..
Assuming that the amount computed in clause 40(1)(a)(iii)(C) of the Act is greater than the amount computed in clause 40(1)(a)(iii)(D) of the Act, the reserve that may be claimed by Mrs. XXXXXXXXXX in XXXXXXXXXX in respect of the property disposed of in XXXXXXXXXX would be 1/5 of $XXXXXXXXXX multiplied by the amount by which 4 exceeds the number of preceding taxation years of Mrs. XXXXXXXXXX ending after the disposition of the property. Mrs. XXXXXXXXXX is deemed to have disposed of the property in XXXXXXXXXX pursuant to paragraph 72(2)(c) of the Act. In XXXXXXXXXX, the number of preceding taxation years of Mrs. XXXXXXXXXX ending after the disposition is three (XXXXXXXXXX, XXXXXXXXXX and XXXXXXXXXX). Therefore, 1/5 of $XXXXXXXXXX (not exceeding $XXXXXXXXXX) could be claimed as a reserve under 40(1)(a)(iii) of the Act for the property deemed to have been disposed in XXXXXXXXXX. In XXXXXXXXXX, Mrs. XXXXXXXXXX will not be able to claim a reserve in respect of that disposition. Therefore, if Mrs. XXXXXXXXXX claims the maximum she may claim ($XXXXXXXXXX), no amount will be included in her XXXXXXXXXX income tax return regarding the property disposed of in XXXXXXXXXX and an amount of $XXXXXXXXXX will have to be included in her income of XXXXXXXXXX pursuant to subsection 40(1) of the Act.
Assuming that the amount computed in clause 40(1)(a)(iii)(C) of the Act is greater than the amount computed in clause 40(1)(a)(iii)(D) of the Act, the reserve that may be claimed by Mrs. XXXXXXXXXX in respect of the property disposed of in XXXXXXXXXX would be 1/5 of $XXXXXXXXXX multiplied by the amount by which 4 exceeds the number of preceding taxation years of Mrs. XXXXXXXXXX ending after the disposition of the property. Mrs. XXXXXXXXXX is deemed to have disposed of the property in XXXXXXXXXX pursuant to paragraph 72(2)(c). In XXXXXXXXXX, the number of preceding taxation years of Mrs. XXXXXXXXXX ending after the disposition is two (XXXXXXXXXX and XXXXXXXXXX). Therefore, 2/5 of $XXXXXXXXXX (not exceeding $XXXXXXXXXX) could be claimed as a reserve under 40(1)(a)(iii) of the Act for the property deemed to have been disposed in XXXXXXXXXX. In XXXXXXXXXX, Mrs. XXXXXXXXXX will be able to claim a reserve in respect of that disposition equal to 1/5 of $XXXXXXXXXX ($XXXXXXXXXX) and in XXXXXXXXXX, Mrs. XXXXXXXXXX will not be able to claim any reserve in respect of the XXXXXXXXXX disposition. Therefore, assuming that the reserve claimed by Mr. XXXXXXXXXX is equal to $XXXXXXXXXX instead of $XXXXXXXXXX, no amount will be included in Mrs. XXXXXXXXXX XXXXXXXXXX income regarding the property disposed of in XXXXXXXXXX if Mrs. XXXXXXXXXX claims the maximum she may claim ($XXXXXXXXXX). In XXXXXXXXXX, an amount of $XXXXXXXXXX will have to be included in her income pursuant to subsection 40(1) of the Act and an amount of $XXXXXXXXXX will have to be included in her income of XXXXXXXXXX pursuant to subsection 40(1) of the Act.
We trust that our comments will be of assistance.
Yours truly
Alain Godin
Section Manager
For Division Director
International and Trusts Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch
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