31 March 1994 External T.I. 9321545 F - Farm Inventory as a Right or Thing

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.

In your letter you have noted the Department's position as outlined in paragraph 6 of Interpretation Bulletin IT-427R where it states:

     "the legal representative may, in computing income for the deceased and the beneficiaries, include an amount for the value of part of the herd of livestock in the return of income of the deceased for the year of death under subsection 70(2) and to transfer or distribute the remainder to the beneficiaries so that subsection 70(3) applies".

In your view, subsections 70(2) and 70(3) of the Act do not authorize the inclusion of only part of the herd of livestock as a right or thing, and it is your belief that the administrative position as stated in IT-427R was developed as a consequence of the former reference to "livestock inventory" only under paragraph 28(1)(b) of the Act as it read for 1988 and prior taxation years.  For 1989 and subsequent years paragraph 28(1)(b) was amended to extend its application toall farm inventory, not just livestock.

You have asked us whether the policy as outlined in paragraph 6 of IT-427R would be extended to all farm inventory in respect of rights or things and not only livestock inventory.

Our Comments

The comments in Interpretation Bulletin IT-427R refer only to livestock inventory since this Bulletin is entitled "Livestock of Farmers".  The Department's general position concerning rights or things are outlined in Interpretation Bulletin IT-212R3 entitled "Income of Deceased Persons  —  Rights or Things" and specifically in regard to farm crops in Interpretation Bulletin IT-234 entitled "Income of Deceased Persons  —  Farm Crops".

The provisions of subsections 70(2) and 70(3) of the Act provide rules for the treatment of rights or things (other than capital property or amounts that would of been included in income under subsection 70(1) of the Act) that a taxpayer owns at the time of his or her death and that would have been included in income if the taxpayer had survived to realize or dispose of these properties.

As indicated in paragraph 10 of IT-212R3, the inventory of harvested grain of a deceased taxpayer who computed income using the cash basis is a right or thing.  In our view, the dictionary meanings of rights or things are broad enough to include any type of property.  Therefore, any type of farm inventory would be considered rights or things.  The legal representative of the decedent and the beneficiaries have three alternatives for reporting the income in respect of thedecedent's rights or things as follows:

(a)       the value of the rights or things can be brought into income in the decedent's income tax return for the year of death along with the other income for          that period by virtue of subsection 70(2) of the  Act,

(b)       if, the legal representative makes the election referred to in subsection 70(2) of the Act, the value of the rights or things can be brought into income in a separate income tax return for the year, or (c)  if prior to the deadline for making the election in subsection 70(2), the right or thing has been transferred or distributed to beneficiaries or other persons beneficially interested in the estate, the provisions of subsection 70(3) would apply and subsection 70(2) of the Act would not such that upon the realization or disposition of the right or thing by one of the beneficiaries or other persons, any amount received shall be     included in computing income of that beneficiary or other person for the taxation year in which it was received.

In regards to an interest in a sown but unharvested crop, paragraphs 1 and 2 of IT-234 state in part:

     "1...Where a taxpayer dies having such an interest, the Department does not insist that any amount representing the value of the unharvested crop be included in computing his income, but such value may be so included  if his executors so desire.  However,...the ultimate proceeds of the whole crop are subject to tax in the group comprising the deceased, his estate and his beneficiaries.

     2...Any amount so included in income reduces the amount to be included in the income of his estate or his beneficiaries when they receive the ultimate proceeds of disposition of the crop."

Considering the above comments, the Department would be prepared to extend similar treatment including that described in paragraph 6 of IT-427R to all types of farm inventory that by its nature is divisible.  However, notwithstanding this extension, it is also our view that the wording of subsection 70(3) of the Act is broad enough to afford such treatment on its own.  Consequently, we do not agree with your view concerning the application of subsections 70(2) and (3) that this option cannot take place in respect of only a part of the livestock.  Subsection 70(3) of the Act provides that:

     "Where before the time for making an election under subsection (2) has expired, a right or thing to which that subsection would otherwise apply has been      transferred or distributed to beneficiaries or other persons beneficially interested in the estate or trust, (a)  subsection (2) is not applicable to that right or          thing, and (b)  an amount received by one of the beneficiaries or other such persons upon the realization of the right or thing shall be included in computing his  income for the taxation year in which he received it."

We would also say that the value of the rights or things that may be transferred to the beneficiaries under subsection 70(3) is restricted to the amount of the bequest to which the beneficiary is entitled.  Based on the decision in the case of Tory Estate v. MNR (76 DTC 6312), if the beneficiary takes more than the amount of his inheritance, he takes the excess as a purchaser for value and the estate is taxable on the excess.

We trust that these comments will be of assistance.

Yours truly,

A.M. Brakefor DirectorBusiness and General DivisionRulings DirectorateLegislative and Intergovernmental  Affairs Branch