25 May 1995 External T.I. 9433325 - RIGHTS OF THINGS - CASH BASIS FARMERS - RECEIVABLES

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.

Principal Issues:

1) Is debt receivable forgiven by cash basis farmer by bequest a right or thing?

2) Where son (also a cash basis farmer) who owes the debt receivable is transferred the debt receivable pursuant to 70(3) will the amount ever by included in the son's income and will he never have the corresponding deduction available to him.

Position TAKEN:

1) Yes the debt receivable forgiven is a right or thing.

2) forgiven debt receivable will never be included in the beneficiary's income and correspondingly there will be no deduction available to him in respect of the forgiven debt.

Reasons FOR POSITION TAKEN:

Previous correspondence, IT-212R3

					943332
XXXXXXXXXX				D. Zion

Attention: XXXXXXXXXX

May 25, 1995

Dear Sirs:

Re: Subsections 70(2) and 70(3) of the Income Tax Act (the "Act")

We are writing in response to your correspondence of December 12, 1994 and March 30, 1995 regarding the application of the above subsections to a debt receivable upon death. We apologize for the delay in replying.

The specific issues which you have raised in your request appear to relate to a factual situation involving specific taxpayers. The tax implications inherent in such a transaction can be determined only by reviewing all the relevant facts and documentation. Such review should be made by the relevant District Tax Services office and, accordingly, the following comments are of a general nature.

You have outlined a hypothetical situation in which a farmer reporting income on a cash basis sold inventory to his son who was also a farmer reporting his income on a cash basis. As a result of the transaction, the father held a note receivable from the son. Accordingly, the father would not include the debt in income until actually received and similarly the son could not deduct the related expense until actual payment of the debt. Specifically, you have asked us to confirm whether, if the debt receivable is forgiven by the father upon his death by bequest, the amount owing would be treated as a right or thing upon his death. Furthermore, assuming the debt receivable is a right or thing to the father, if the debt is transferred to the son pursuant to subsection 70(3) of the Income Tax Act (the Act) you are of the view that the amount will never be included in the son's income and he will never have the corresponding deduction available to him.

Our Comments

The general provision setting out the deductions available to cash farmers is paragraph 28(1)(e) of the Act, which provides that only amounts which have been paid are deductible, subject to some other provision which might deem the amount to have been paid in the year. Having historically elected to report his income on a cash basis, and not having changed methods in the manner provided for in subsection 28(3) of the Act, the taxpayer is obliged to file on a cash basis in the year of death subject only to specific rules providing otherwise, such as subsection 70(2) in respect of rights or things or subsection 70(1) of the Act in respect of amounts receivable on a periodic basis.

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 have 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 11 of IT-212R3, Income of Deceased Persons - Rights or Things, where a taxpayer reports income on the cash basis and an amount is owing to the taxpayer on the sale of inventory, the taxpayer has a debt receivable that is a right or thing. Where such a debt is forgiven by the decedent by bequest, the debt is no less a right or thing but section 80 of the Act does not apply as a result of paragraph 80(1)(h). The legal representative of the decedent and the beneficiaries have three alternatives for reporting the income in respect of the decedent's rights or things. In the situation under consideration if the debt is transferred to the beneficiary (who is also the debtor) pursuant to Subsection 70(3) of the Act, then we are in agreement with your view that the forgiven debt receivable will never be included in the beneficiary's income and correspondingly there will be no deduction available to him in respect of the forgiven debt.

We trust our comments will be of assistance to you.

Yours truly,

P.D. Fuoco
for Director
Business and General Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch