21 August 1991 Income Tax Severed Letter 911422 - [Subsections 70(1) and (2)]

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.

Glen Thornley

Attention: XXXX

August 21, 1991

Dear Sirs:

Re: Subsections 70(1) and (2) of the Income Tax Act (the "Act")

This is in reply to your letter of May 21, 1991 requesting further comment with respect to your earlier letter of October 31, 1990 .

You refer in your October 31, 1990 letter to an exchange of previous correspondence in 1985. In particular you make reference to a statement in our July 29, 1985 letter that reads, "We confirm that upon death of a taxpayer subsection 70(2) applies to interest accrued or compound interest Canada Savings Bonds". That statement was made in reply to your request that we confirm that interest on compound interest Canada Savings Bonds and other compound instruments will be reportable under subsection 70(2) of the Act rather than subsection 70(1) of the Act.

We note that we did not confirm an additional statement made in your April 9, 1985 letter to the effect that, in your view, compound interest Canada Savings bonds and other compound instruments do not satisfy a pre-condition that they be "payable periodically" in order for subsection 70(1) of the Act to apply to any accrued interest to the date of death.

Our comments

The Department's general approach to this matter is set out in paragraph 3 of Interpretation Bulletin IT-212R3 where it states "Where there is genuine doubt about whether income earned before a taxpayer's death is a periodic payment or a right or thing, its treatment is generally resolved in favour of the taxpayer". Thus, in cases of doubt the legal representative may report the income in question under subsection 70(1) or under subsection 70(2) of the Act. With respect to compound interest debt instruments and term deposits, it is the Department's view that because interest accrues on a daily or other periodic basis that such interest is considered to be payable periodically even though it may not be due or paid until maturity. Thus, technically, at the date of death all accrued and unpaid interest on such bonds should be reported in the deceased's return pursuant to paragraph 70(1)(a) of the Act.

However, as indicated in earlier letters, the Department has a long- standing position that interest accrued on a compound interest Canada Savings Bond to the November 1 date preceding the date of death may represent a "right or thing" for purposes of subsection 70(2) and (3) of the Act and only the interest accrued from November 1 to the date of death is considered to be an amount referred to in paragraph 70(l)(a) of the Act. Compound interest Canada Savings Bonds may be cashed in before maturity or they may be exchanged for Canada Savings Bonds that pay interest on an annual basis. When compound interest Canada savings bonds are exchanged for annual bonds a cheque is issued to the holder for any interest accrued from the date of issue to the previous November 1.

In our view interest accruing on other compounding debt instruments and term deposits would generally not qualify for the special treatment referred to above as they can not, presumably, be exchanged for shorter term paper (bearing matured coupons or the equivalent) or turned to cash in a manner similar to compound interest Canada Savings Bonds. However, if you have a particular debt instrument in mind we suggest you refer it or its terms to this office for our review and consideration.

We trust our comments will be of assistance.

Yours truly,

for Director Business and General Division Rulings Directorate Legislative and Intergovernmental Affairs Branch