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:
Accrual rules on debt obligations held by the estate of a deceased taxpayer. Can the estate make an additional accrual to the end of its taxation year (ie: essentially to what would be the anniversary date ending in the taxation year and then a further accrual to the end of the taxation year).
Position:
This particular situation deals with debt obligations that may not be investment contracts. However, accrual under 12(4) is only applicable where there is an anniversary date in that year. Therefore no accrual as suggested by taxpayer.
Reasons:
The law
XXXXXXXXXX 961838
October 15, 1996
Dear Sir:
Re: Estate's Accrual of Interest Income
This is in reply to your letter dated May 6, 1996, wherein you requested our views as to the proper amount of interest income to report under the Income Tax Act (the "Act") in the taxation year of an estate which is created on the death of a taxpayer. We apologize for the length of the delay in our response.
In your letter you state that a taxpayer died in August, 1995 and that the taxpayer's entire estate consisted solely of term deposits issued by various financial institutions. You advised that if the aforementioned term deposits pay interest annually, say on November 1, then any interest accrued to the date of the taxpayer's death in August is required to be included in the taxpayer's final T1 return with the balance of the interest to the date of actual payment on November 1, 1995, required to be included in the estate's T3 return for that year.
Your question is can the estate accrue additional interest on the term deposit from November 1, 1995 (the date the interest is actually paid on the term deposit) to the end of the estate's taxation year ending in August, 1996 (ie: the anniversary date of the taxpayer's death)?
The situation described in your letter relates to a completed transaction involving specific taxpayers. The Department is unable to provide you with specific comments on the income tax implications inherent therein without a complete review of all the relevant facts and information of each particular situation. Such a review would be made by your local Tax Services Office. Notwithstanding the above, we can offer the following general comments which we caution may or may not be applicable to your particular situation.
In providing our general response we have assumed that the administration of the particular estate is not completed within the 12-month period commencing with the taxpayer's death, such that as a matter of law, beneficial ownership of the property is not considered to have passed to the heirs.
Subject to subsections 12(3), 12(4) and 12(9) of the Act, paragraph 12(1)(c) of the Act requires a taxpayer to include in computing income for a year, the amount of any interest received or receivable (depending on the method regularly followed by the taxpayer) by the taxpayer in the year. Under the received method, interest is included in the taxpayer's income for a particular taxation year only when it is actually received by the taxpayer (ie: on a cash basis). Under the receivable method, interest is included in the taxpayer's income for a particular taxation year only when the taxpayer actually has the right to receive payment of the interest in that year.
Subsection 12(3) of the Act generally requires a corporation, partnership, unit trust or any trust of which a corporation or partnership is a beneficiary to include interest on certain debt obligations on an annual accrual basis whether receivable in the year or not (ie: as earned). However, under subsection 12(4) of the Act, where a taxpayer, other than a taxpayer for which subsection 12(3) applies, holds an interest in an "investment contract" on any "anniversary day" of that contract, an accrual of interest to the end of that time is required to be included in a taxpayer's income for that year, to the extent that any such amount has not otherwise included in the taxpayer's income for the year, or any preceding year.
The terms "investment contract" and "anniversary day" are defined in subsection 12(11) of the Act. Investment contract generally means any debt obligation, other than certain listed exceptions, in respect of which a taxpayer is not otherwise required (but for subsections 12(3) or 12(4) of the Act) to include the interest in income on an anniversary day. Anniversary day means the day that is one year after the day on which the debt obligation was issued and each day occurring at every successive one year interval from that time and also includes the day on which the debt obligation is disposed of by a taxpayer.
While the terms of any particular debt obligation would have to be examined to determine whether such a debt obligation would be an investment contract, generally, where a fixed yield term deposit pays the interest on an annual basis and is not otherwise found to be a "prescribed debt obligation" (see subsection 12(9) of the Act and section 7000 of the Income Tax Regulations) such a debt obligation would be excluded from the definition of investment contract by virtue of paragraph (i) of that definition and no accrual under subsection 12(4) of the Act is required.
Consequently, where a trust or estate (for which subsection 12(3) of the Act does not apply) holds a debt obligation that is not an investment contract, the trust or estate would only be required to report the amount of interest on a received or receivable basis pursuant to paragraph 12(1)(c) of the Act. The estate would not be allowed to make an additional accrual of interest on the debt obligation to the end of its taxation year.
While we trust the foregoing comments are useful they are given in accordance with the practice referred to in paragraph 21 of IC 70-6R2 dated September 28, 1990 and are not binding on the Department.
Yours truly,
for Director
Resources, Partnerships
and Trusts Division
Income Tax Rulings and
Interpretations Directorate
Policy & Legislation Branch
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