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.
REVENUE CANADA ROUND TABLE
MANITOBA INSTITUTE/BAR - FEBRUARY 1995
Question # 1
SUBJECT: RESERVE FOR DEBT FORGIVENESS IN YEAR OF DEATH
Relief is provided to debtors in the event that the forgiveness or extinguishment of an arm's length debt results in income for the debtor and the debtor has reduced its tax attributes (e.g. loss carryforwards) to the maximum extent possible. If the debtor is an individual resident in Canada, the debtor can claim a reserve in respect of such income inclusion in computing the debtor's income. The effect of the reserve mechanism is to require income arising from the settlement of a debt to be included in computing income only to the extent of 20% of the debtor's income in excess of a $40,000 threshold.
What happens to this type of reserve in the year of death? Is the prior year's reserve included in income in the final terminal return? If so is the full amount or only a partial amount included in income? Please explain.
Department's Position
Provided that the Revised Draft Amendments to the Income Tax Act released by the Minister of Finance on December 20, 1994 (the "Draft Legislation") is enacted exactly as set out therein, our view is that the prior year's reserve must be included in the computation of the income of the deceased taxpayer under section 56.2 of the Act and that a deduction could be claimed under section 61.2 in the final terminal return of a deceased individual filed pursuant to subsection 150(1) of the Act. No amount in connection with any claim under section 61.2 will be required to be added in computing the income of the individual's estate or heirs.
New section 61.2 of the Act was not added to the list of reserves described in subsection 72(1) of the Act. This exclusion suggests the legislator's intent to permit the continued availability of a reserve for debt forgiveness under new subsection 61.2 of the Act in respect of forgiven amounts for the taxation year in which an individual dies.
Author: P. Diguer
File Number: 7-950044
Date: January 16, 1995
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