Section 70

Interest on most compound debt instruments and term deposits accrues on a daily basis, with the result that on the holder's death, the accrued interest is required to be included in income under s. 70(1) rather than s. 70(2) or (3). However, where the instrument is a compound interest Canada savings bond, only interest accrued on the bond after the November 1 preceding the date of death is required to be included in the return filed under s. 70(1). The interest that has accrued prior to that date may be treated as a "right or thing".

A taxpayer died in October 2021 after a pay equity settlement was reached with the Quebec government in June 2021. At the end of 2022, the estate received the pay equity amount (the “adjustment”) and received a related T4 slip for the 2022 taxation year in early 2023.

(a)

Must the adjustment be included in the terminal return for 2021 even though the income was not received until 2022?

(b)

A rights or things return under s. 70(2) must be filed not later than the later of the day that is one year after the date of death of the taxpayer and the day that is 90 days after the sending of any notice of assessment in respect of the tax of the taxpayer for the year of death. In order not to miss this deadline, could such return be filed on a timely basis, showing an estimated amount for the adjustment, with a subsequent amendment if required?

(a)

CRA stated:

We consider that retroactive payroll adjustments, where a collective agreement or other authorizing document was signed prior to the date of the taxpayer's death, generally constitute rights or things referred to in subsection 70(2). In such a case, the amount of the adjustments is taxable in the year of the taxpayer's death and not in a subsequent year in which the amount is actually paid. This is the case even though the employer is required to issue the taxpayer a T4 slip for the year in which the amount is paid.

Accordingly, as the time for filing a rights or things return had expired, the “executor should therefore file an amended T1 Final Return to include the amount of the salary adjustment to the extent that the taxpayer's entitlement to the salary adjustment existed and was determinable at the time of death.”

(b)

CRA stated:

Where it is not possible, for example because of administrative delays, to obtain from the employer the precise amount of the pay equity adjustment payment within the time required to make the election under subsection 70(2) and to file a Rights or Things Return, the CRA will generally accept the filing of such a declaration where the taxpayer declares an amount estimated on the basis of the best information available at the time the declaration is filed. Once the value of the rights or things referred to in subsection 70(2) has been determined with greater certainty, the representative must, if necessary, amend the return.

A corporation wholly-owned by a discretionary non-testamentary trust (with an individual, his spouse and children as beneficiaries) declares a dividend, with the trustees then resolving that the trust will pay the dividend on receipt to the individual – who dies before the dividend is received by the trust. The dividend when received is paid to the estate. CRA stated (TaxInterpretations translation):

[A]n amount which a taxpayer has the right to receive at the moment of his or her death and whose value is determinable can constitute a right or thing under subsection 70(2) even if it is not payable ["exigible" – also translatable as "due"] at the moment of death because it is subject to a condition.

…In this case, it would be necessary to examine the trust deed and the trustees' resolution in order to determine if, at the moment of death, the individual had a right to receive an amount from the trust or if the existence of such a right was subject to an unsatisfied condition, namely the receipt by the trust of a dividend declared by the corporation.

The taxpayer's share of partnership income from the beginning of the fiscal period to the date of death was included in the taxpayer’s terminal return; and the taxpayer's share of the work in progress (which had been excluded from partnership income pursuant to s. 34) was included in a separate return pursuant to an s. 70(2) election. To date, none of the estate property has been distributed to the beneficiary (the surviving spouse).

Does s. 70(3) apply and, if so, how can the situation be corrected? After noting that “the amount to be received by a [deceased] taxpayer, resulting from an election made pursuant to subsection 34(1), is a right or thing under subsection 70(2),” CRA stated:

The application of subsection 70(3) will depend on what the estate chooses to do with respect to the deceased taxpayer's receivables as well as the timing of the estate's choice. If it chooses to wait until the consideration for the receivables is payable and include the receivables in the beneficiary's return, subsection 70(3) may apply if an election is made before the expiry of the time allowed in subsection 70(2). If the estate opts for this second election, the income will be included in the return of the beneficiary of the estate.

If an election under subsection 70(2) has already been made by the estate, the estate may revoke that election if the legal representatives of the estate submit a notice of revocation to the Minister as provided in subsection 70(4). The notice of revocation must meet the deadlines set out in subsection 70(2).

An individual who had been receiving long-term disability benefits after an illness had prevented continuation of the individual’s employment, brought an action when the insurance company ceased the benefit payments. The action was settled after the individual’s death by payment to the estate of long-term disability benefits that were unpaid during the individual's lifetime, and a survivor's benefit. After noting that the disability payments received by the individual would have been taxable during the individual’s lifetime under s. 6(1)(f), CRA went on to find that, in accordance with Tsiaprailis, the amount of the settlement that was referable to such unpaid amounts was taxable, and then found that the rights and things alternative was available, stating:

[I]f the portion of the amount paid by the insurance company following the out-of-court settlement as long-term disability benefits related to periodic benefits that had fallen due, such benefits received by the estate in 2008 would constitute a right, or thing since at the time of his death it appears to us that the individual had a legal right to the said benefits and that its amount could be determined by the parties.

Before addressing the treatment of $5,000 paid by a union to an active member on the member’s death, CRA discussed the treatment of amounts paid during a member’s lifetime, noting that refunds would entail denial of s. 8(1)(i) deductions of the dues, and that “the portion of the refund that exceeds the taxpayer’s annual dues must be added to the taxpayer’s income by virtue of paragraph 6(1)(j).” CRA then stated:

[I]f the deceased taxpayer had, at the time of death, rights or things under the applicable contracts, the provisions of subsection 70(2) could apply. Thus, by virtue of this subsection, the value of the rights or things that the deceased had at the time of death must be included in the individual’s income upon the realization or disposition of such rights or property unless the individual’s legal representative elects to file a separate income tax return or subsection 70(3) applies.

Thus, to the extent that subsection 70(2) applies to deceased members who receive the $5,000, it is our view that the tax consequences would be as explained above with respect to union dues.

After noting that the inventory of an artist that is valued at nil pursuant to s. 10(6) is a right or thing, CRA indicated that, subject to s. 70(3), the value of the inventory is included in the deceased’s terminal return unless the legal representative elects under s. 70(2) to file a separate return for the year of death. Where s. 70(3) does not apply, the person acquiring the inventory on death is deemed by s. 69(1)(c) to have acquired it at its fair market value, and any subsequent disposition of that inventory generally will be on capital account.

Where s. 70(3) applies, the value of the deceased's rights or property will instead be included in computing the income of the beneficiary for the taxation year in which the beneficiary received it, and the beneficiary’s cost will be determined under s. 69(1.1) to equal the total of the part of the cost thereof to the deceased as had not been deducted by the deceased in computing the deceased’s income for any year, and any expenditures made or incurred by the beneficiary to acquire the property – which cost will be used to compute the beneficiary's income when the inventory is sold. If s. 70(3) applies, the sale of the inventory by the beneficiary will be treated as an income transaction.

CCRA confirmed that income from rights or things, included in a separate return of a deceased spouse pursuant to s. 70(2), does not count towards the deceased's income in the taxation year of the deceased’s death for the purpose of determining the amount that could be claimed in the terminal return of the deceased spouse as a married or common-law partner credit under s. 118(1)(a), stating:

[T]he deceased spouse's return of income from January 1 of the year of death to the date of death and the separate return filed pursuant to subsection 70(2) are considered as filed by different taxpayers.

A dividend declared by a corporation within a month following the end of its fiscal period that is payable 14 months after the end of that fiscal period and that is equal in amount to three times the corporation's refundable dividend tax on hand at the end of the fiscal period in which the dividend is declared, will not qualify as "rights or things" for purposes of s. 70(2) where the individual shareholder dies within three months following the declaration of the dividend, because the determination of the refundable dividend tax on hand would involve income realization (or losses) during the period subsequent to the individual's death.

Old age security benefits which the estate is entitled to apply for and which would have been payable to the deceased had an application been made prior to death will be considered to be rights or things.

Would s. 70(3) apply where the will bequeathed rights and things (here, artistic works which had been included in the deceased artist’s inventory, the “Property”) to a testamentary trust whose beneficiaries were the spouse and descendants of the deceased? CRA stated::

[T]o the extent that the testamentary trust is, under applicable private law, a beneficiary of the estate at the time of the transfer or distribution of the Property by the estate, the testamentary trust could be considered a beneficiary or a person beneficially interested in the estate of the deceased individual for the purposes of subsection 70(3).

The taxpayer's share of partnership income from the beginning of the fiscal period to the date of death was included in the taxpayer’s terminal return; and the taxpayer's share of the work in progress (which had been excluded from partnership income pursuant to s. 34) was included in a separate return pursuant to an s. 70(2) election. To date, none of the estate property has been distributed to the beneficiary (the surviving spouse).

Should the amount representing the work in progress be included in the income of the taxpayer or the estate when paid by the partnership? CRA responded:

The application of subsection 70(3) will depend on what the estate chooses to do with respect to the deceased taxpayer's receivables as well as the timing of the estate's choice. If it chooses to wait until the consideration for the receivables is payable and include the receivables in the beneficiary's return, subsection 70(3) may apply if an election is made before the expiry of the time allowed in subsection 70(2). If the estate opts for this second election, the income will be included in the return of the beneficiary of the estate.

If an election under subsection 70(2) has already been made by the estate, the estate may revoke that election if the legal representatives of the estate submit a notice of revocation to the Minister as provided in subsection 70(4). The notice of revocation must meet the deadlines set out in subsection 70(2).

Where the value of the inventory of an artist’s business was deemed to be nil pursuant to s. 10(6), and s. 70(3) applied to the transfer of a right or thing to a beneficiary of an estate or trust, can s. 70(3) apply again upon the death of that beneficiary? CRA responded:

[F]or the property transferred to a beneficiary or beneficiaries to be rights or things pursuant to subsections 70(2) and (3), the election under subsection 10(6) must be made by the beneficiary or beneficiaries. In order for that election to be made, the property must be property in the inventory of the beneficiary or beneficiaries and, furthermore, property in the inventory of an artistic business of the beneficiary or beneficiaries. ... .[T]hose conditions will generally not be satisfied.

On the death of a minor child who was either the beneficiary of an annuity described in s.60(l)(ii)(B) or the income beneficiary of a trust holding such annuity, such rights or things would be eligible for the election under s. 70(3).

The child's rights as annuitant or, as the case may be, as income beneficiary of the trust that acquired the annuity, constitute "rights or things" referred to in subsection 70(2). Consequently, the value of those "rights or things" at the time of death must be included in computing the child’s income for the taxation year of death. However, it is possible, pursuant to subsections 70(2) and (3), to elect to have the value of those "rights or things" reported on a separate income tax return or included in the income of the beneficiary to whom those "rights or things" were transferred on death.

What happens on the death of a resident beneficiary holding a capital interest in a resident trust which has vested indefeasibly?

CRA indicated that a beneficiary holding an indefeasibly vested capital interest is deemed pursuant to s. 70(5) to have disposed of it for proceeds equaling its fair market value immediately before the beneficiary’s death. S. 107.4(4) deems the fair market value of the capital interest to be not less than the beneficiary’s pro rata share of the fair market value of the total net assets of the trust.

At the 2009 British Columbia tax conference the CRA stated:

"...non-participating controlling shares have some value and may therefore bear a premium. However, in the context of an estate freeze of a Canadian-controlled private corporation, where the freezor, as part of an estate freeze, keeps controlling non-participating preference shares in order to protect his economic interest in the corporation, the CRA generally accepts not to take into account any premium that could be attributable to such shares for the purposes of subsection 70(5) of the Income Tax Act at the freezor's death."

In ITTN-44, the CRA commented that, in the context of estate freezes of private corporations:

“Provided that the owners of all the shares of the corporation act in a manner consistent with the assumption that no value attaches to the voting rights, and the rights are eventually extinguished for no consideration, the CRA will generally not attribute value to the rights. If the holder of the rights uses them to run the corporation in conflict with the common shareholders or seeks or is offered consideration for them, it would be difficult for the CRA to ignore this evidence of value.”

CRA stated that these quoted positions continue to reflect the CRA’s current policy.

In the course of dealing with a secondary issue, McKenzie stated that s. 70(5) does not apply to a non-resident person. CRA stated that this has not changed its long-standing view that s. 70(5) applies to non-residents.

S. 39(1.1) would not apply to a sum of money in foreign currency held on deposit by an individual at a financial institution. Instead the individual would be regarded as holding a debt of that institution, which would be subject to the usual rules (e.g., ss. 39(1) and 70)) on its disposition.

CRA indicated that a (U.S.) revocable living trust is a true trust and not a bare trust given that it has remainder beneficiaries. CRA then was asked: Would a Canadian resident who is a remainder beneficiary be considered to have “acquired” the capital interest from the decedent at a cost equal to its fair market value immediately prior to the death of the grantor?

CRA indicated that the capital interest of the remainder beneficiary would have been acquired as a consequence of the terms of the trust and not as a consequence of the death of the settlor, so that s. 70(5)(b) would not apply to determine the adjusted cost base of the remainder beneficiary’s capital interest in the trust.

The sole beneficiary of an inter vivos trust (the "Trust"), whose interest under the Trust had vested indefeasibly, died, as a result of which his capital interest passed as part of his estate to his beneficiary.

After noting that the deceased was deemed on death to have disposed of his capital interest for its fair market value, CRA stated that s. 107.4(4) "would apply to ensure that the FMV of the capital interest…was at least equal to the FMV of the Property of the Trust…." Furthermore, s. 70(5)(b) "applied so that the estate was deemed to have acquired the capital interest at its FMV immediately before the death."

Respecting the situation where the capital interest of the individual beneficiary had not yet irrevocably vested so that it was extinguished on his death, CRA stated that "we are not in a position to confirm that this interest would have no value immediately before the death" as this would turn on "an examination of all the facts and the exercise of judgment of a professional valuator."

Mr. A engages in an estate freeze transaction in Year 1 in which all his common shares are exchanged in a s. 86 reorganization for preferred shares whose terms contain a price adjustment clause. Following his death in Year 16 years later, CRA determines that the redemption value of these preferred shares at the time of their issuance was less than the fair market value of the common shares.

If the price adjustment clause was "valid," i.e., it complied with IT-169 including that the valuation method used in Year 1 was "fair and reasonable," then the redemption amount of the preferred shares would be automatically increased retroactively to Year 1, thereby increasing the fair market value proceeds of the deemed disposition of those shares in Year 16 on the death of Mr. A. If the price adjustment clause was not valid, it "could be argued" that there was a misrepresentation that opened up Year 1 to reassessment under s. 86(2).

The questioner referenced the CRA statement at the 2009 British Columbia Tax Conference that, in the context of an estate freeze of a Canadian-controlled private corporation, where the freezor, as part of the estate freeze, keeps controlling non-participating preference shares in order to protect his economic interest in the corporation, CRA generally accepts that no premium should be attributed to such shares in determining their fair market value under s. 70(5), and asked whether this position also applies for the purposes of s. 104(4)(a), e.g., re the deemed disposition arising on the death of the spouse who is the beneficiary of a spousal trust. CRA stated:

...as was noted, CRA generally will ignore any premium that could be attributed to controlling non-participating preference shares, for purposes of subsection 70(5)...where the shares were held to protect the deceased's economic interest in the corporation....[W]e have not had the opportunity to give full consideration to whether the above position should apply for purposes of [s. 104(4)(a).]

At the time of Mr. X's death, the usufruct of all the property held by Mr. X, including his undivided share in a two-unit Immovable, devolved to his surviving spouse (Ms. X) and the bare ownership devolved to the children. Ms. X remained in her home (one of the units), and the Immovable was subsequently sold.

After indicating that, pursuant to s. 248(3)(a), on the death Ms. X acquired an income interest in a testamentary trust, and the children acquired a capital interest, and that, pursuant to s. 70(5), such trust acquired the Immovable at a deemed cost equal to the property’s FMV (subject to the application of the ITAR rules), given that the trust was not a spousal trust.

The taxpayer wants the proceeds of the universal life insurance policy on his life paid on his death to his adult child, rather than to his spouse, who is the one under his will to inherit his shares of the private corporation (the “Corporation”) that will be the policyholder and beneficiary.

To this end, the Corporation issues for $1 a special non-voting share (the “insurance share") to the child that is non-participating except for an entitlement to a dividend (to be declared only after the taxpayer’s death) equaling the policy death benefit payable under the policy. The share also is retractable by the holder before the taxpayer's death, for the policy’s cash surrender value (“CSV”), but with payment deferred until the Corporation’s receipt of the death benefit, and is retractable by the holder (and redeemable by the Corporation) after the Corporation’s death for any excess of the death benefit over the dividend declared. The initial CSV is nil.

S. 70(5.3) indicates that, for purposes inter alia of s. 70(5), the fair market value of a share of the deceased shall be determined as if the fair market value (immediately before the death) of a policy on the deceased’s life was its cash surrender value (“CSV”).

CRA confirmed that, regarding the narrow issue of the FMV of the common shares immediately before the death of the taxpayer, given that the insurance share was retractable by the holder immediately before the death for the CSV, it would not be unreasonable to allocate the policy CSV to the insurance shares – so that the value of the common shares would not take the policy CSV into account.

The shareholder of a wholly-owned corporation acquires for $1 a special share that is redeemable for $1 at the discretion of the corporation and that entitles the holder to receive a dividend equaling the death benefit under the policy on the shareholder’s death. The corporation then purchases the policy, pays the premiums and is the beneficiary. At the shareholder’s death, he holds all of the common shares and the special share.

CRA indicated that it appeared that the overall value of the corporation that would be attributed to the special share immediately before the death would be nominal. Accordingly, the value of the common shares immediately before the death would take into account almost the entire cash surrender value of the life insurance policy.

At the time of the death in 1985 of the taxpayer’s father, the usufruct under French law of a rental property located in France vested in the taxpayer’s mother, while the bare ownership of the same property vested in the taxpayer, who was responsible, as bare owner, for major works to the property. CCRA indicated that the taxpayer acquired the bare ownership of the property at the time of the death for the FMV of the bare ownership at that time.

On the death of Mrs. X, a life interest in a residence was received by her surviving husband (Mr. X) and the remainder interest by her daughter (Ms. A). S. 70(5) applied to the remainder interest gifted to Ms. A and s. 70(6) applied to the life interest gifted to Mr. X.

Mr. X was deemed to dispose of his life interest for its fair market value immediately before his death. Such a deemed disposition likely would result in a capital loss, but it would be deemed to be nil by virtue of s. 40(2)(g)(iii) respecting personal-use property.

Respecting valuation, CRA stated:

the FMV of a remainder interest in a real property at a particular time is equal to the FMV of that real property minus the FMV of the life interest therein. The calculation of the FMV of the life interest would usually be based on the following elements: FMV of the real property, a reasonable rate of interest, life expectancy of the beneficiary of the life interest at the date of transaction, and any other factors relevant to the specific case… .

Where a Canadian resident individual inherits the shares of a publicly-traded company from a foreign relative, those shares will have a nil cost amount to him under s. 107(2)(b). Although under ss.70(5)(a) and (b) a deceased taxpayer is deemed to have disposed of capital property at fair market value and the person acquiring such property as a consequence of the taxpayer's death is deemed to have acquired them for the same amount, "in our view, a non-resident individual that is not subject to taxation in Canada, pursuant to subsection 2(3) of the Act, is not subject to the deemed disposition rules in paragraph 70(5)(a). Consequently, we would not expect the provisions of paragraph 70(5)(b) to apply to an estate that acquired property as a consequence of a non-resident person's death ... ."

The taxpayer's representative argued that because each joint tenant has an interest in the whole of the property, when the first joint tenant dies the surviving tenant does not acquire anymore property. In rejecting this interpretation, RC referred to the broad definition of property and concluded that s. 70(5) applies to deem the first to die of two joint tenants to have transferred his joint interest immediately before this death for proceeds equal its fair market value.

Where a taxpayer died in the Province of Quebec before 1989 in possession of property subject to a usufruct, s. 70(5)(c) would apply to the person who acquired the naked ownership of the property subject to the usufruct.

Mr. X bequeathed all his property to his children including goodwill that he had generated over the years from his business, which his estate then sold for $100,000 to a non-arm’s length purchaser payable over 5 years at a rate of 20% per annum, subject to price adjustment. From year 1 to year 5, the estate claimed a reserve under subparagraph 40(1)(a)(iii) and reported an annual capital gain of $20,000. S. 12(1)(g) was inapplicable. Does s. 70(5.1) apply; and what are the tax consequences of the price adjustment? CRA responded:

[T]he estate of Mr. X is deemed, under paragraph 70(5.1)(b), to have acquired a capital property at a cost equal to the deemed proceeds of disposition to Mr. X, being a cost of nil. Thus, when the estate disposed of goodwill for proceeds of disposition of $100,000, it realized a capital gain of $100,000.

… IT-169 … addresses situations where the CRA determines that the FMV is higher or lower than the price otherwise determined by the parties to an agreement. Consequently … this Bulletin does not apply in this situation.

[I]t is impossible … to comment as to its retroactive effect to the day of the initial transaction, since we do not have all the particulars … .

Does "land" in s. 70(5.2) include not only vacant land but also land on which other real property is erected, such as houses for sale or condo units? CRA responded:

The Act does not define "land" except for the purposes of subsection 18(2), where subsection 18(3) defines "land" to specifically exclude buildings and other structures … .

For the purposes of the Act, in the absence of a provision similar to the definition in subsection 18(3), a building or other structure affixed to land would generally be considered as part of the land.

Thus … for the purposes of subsection 70(5.2) … "land" includes not only vacant land, but also land on which other real property such as houses or condos are erected.

As a result of a lease of subsurface rights to an oil company, Mr. A received monthly royalty payments (the "Royalty Payments"), which continued to his estate.

Provided that the royalty qualified as a Canadian resource property (under para. (d)), the deemed fair market value proceeds of the Royalty received by Mr. A immediately before death under s. 70(5.2)(a) represented proceeds of disposition of a CRP, which would have been deducted from his CCOGPE balance, with any resulting negative amount being included in his income pursuant to element F of the s. 66.4(5) definition.

Under s. 70(5.2)(b), the Estate would acquire the Royalty at its fair market value immediately before his death and this amount should be added to its CCOGPE balance, so that it would be entitled to 10% deductions under s. 66.4(2). The Royalty Payments will be included in the Estate's income under s. 9 or 12(1)(g).

By virtue of being a member of a partnership (SENC), Mr. X was allocated his share of Canadian development expense (CDE) incurred by a corporation whose flow-through shares were held by SENC, and deducted 30% of his resulting CCDE balance for that year. In the subsequent year of his death, can there be any recognition of his remaining CCDE balance?

After noting that “[n]o further deduction would be available in respect of the unamortized balance of the CCDE and the unutilized balance of the CCDE could not be transferred to Mr. X's estate,” CRA went on to state:

[S]ubsection 70(5.2), which sets out the rules applicable where a taxpayer who owns a Canadian resource property dies in a taxation year, would not be applicable … since it is our position that Mr. X's interest in SENC would not constitute a "Canadian resource property" … .

A non-resident individual, upon becoming resident in Canada, owned shares of a non-resident corporation (Foreignco A) which was the policyholder of a foreign life insurance policy on the life of the immigrating individual. CRA stated:

[S]ubsection 70(5.3) … would apply … for the purpose of determining the FMV of the Foreignco A shares owned by the individual at the time of disposition [under s.] 128.1(1)(b) … . [T]he FMV of the Foreignco A shares owned by the non-resident individual would be determined as though the FMV of the corporate-owned foreign life insurance policy were the policy’s cash surrender value.

However, a foreign life insurance policy (which CRA intimated would not be an “excluded right or interest under para. (l) of the definition in s. 128.1(10)) held by a non-resident corporation when it became resident in Canada would not be subject to s. 70(5.3), and for purposes of determining its deemed cost under s. 128.1(1)(c), it “would be valued in accordance with normal valuation practices taking into consideration all facts relevant to the particular case.”

A shareholder wants the proceeds of an insurance policy on his life, held by a corporation of which he is the sole shareholder (holding all the common shares), to be paid to his former spouse.

To this end, the shareholder acquires for $1 a special share that is redeemable for $1 at the discretion of the corporation and that entitles the holder to receive a dividend equaling the death benefit under the policy on the shareholder’s death.

The corporation then purchases the policy, pays the premiums and is the beneficiary. At the shareholder’s death, he holds all of the common shares and the special share.

In 2005-0138361C6 CRA indicated that it appeared that the overall value of the corporation that would be attributed to the special share immediately before the death would be nominal. Accordingly, the value of the common shares immediately before the death would take into account almost the entire CSV of the life insurance policy.

CRA now confirmed that such comments “continue to apply to that identical fact situation.”

The taxpayer wants the proceeds of the universal life insurance policy on his life paid on his death to his adult child, rather than to his spouse, who is the one under his will to inherit his common shares of the private corporation (the “Corporation”) that will be the policyholder and beneficiary.

To this end, the Corporation will issue for $1 a special non-voting share (the “insurance share") to the child that is non-participating except for an entitlement to a dividend (to be declared only after the taxpayer’s death) equaling the policy death benefit payable under the policy. The share also is retractable by the holder before the taxpayer's death, for the policy’s cash surrender value (“CSV”), but with payment deferred until the Corporation’s receipt of the death benefit, and is retractable by the holder (and redeemable by the Corporation) after the Corporation’s death for any excess of the death benefit over the dividend declared. The initial CSV is nil.

In 2005-0138111C6, CRA was asked to confirm that immediately before the taxpayer’s death, the policy’s CSV would not under s. 70(5.3) increase the fair market value of the common shares held by the taxpayer, since the CSV would be reflected in the redemption amount of the insurance share held by the child.

CRA indicated that it would be reasonable to allocate the CSV between classes of shares based on their respective share terms. Here, as the insurance share was retractable by the holder immediately before the death for the CSV, it would not be unreasonable to allocate the policy CSV to the insurance shares – so that the value of the common shares would not take the policy CSV into account.

CRA now confirmed that such comments “continue to apply to that identical fact situation” in regards to the specific common share valuation issue raised.

Opco and A (its sole shareholder) jointly acquired a universal life insurance policy on the life of A, whose stipulated death benefit equals $1 million plus the fund value of the policy immediately before A’s death. Under a co-ownership agreement, Opco is entitled to the $1 million face amount on death and bears the annual insurance charges; and A is entitled to make additional (exempt-test qualifying) deposits into the policy, can designate the fund value recipient, and is also entitled to the cash surrender value (“CSV”) on any pre-death termination.

A dies when the fund value (and CSV) of the policy equals $200,000, so that Opco receives $1 million and A’s estate receives $200,000. Is the FMV of the life insurance policy for s. 70(5.3) purposes $200,000; and is the FMV of Opco’s interest in the policy nil, as it has no interest in the CSV pursuant to the co-ownership agreement? CRA responded:

[W]here a life insurance policy is jointly-held between a corporation and another taxpayer, subsection 70(5.3) of the Act does not specify the allocation of the CSV of the life insurance policy between separate interests or different policyholders in the policy, nor does the provision determine the value of the respective interests held by joint owners of a life insurance policy.

Consequently, we cannot definitively conclude that the FMV of the interest in the life insurance policy to Opco will be nil. The terms and conditions of the shared ownership arrangement, the specific life insurance contract and all other related agreements which may form part of the particular arrangement and the particular facts at the given time would have to be considered in the determination of the FMV of Opco’s interest in the life insurance policy.

… The CRA does not have its own method for computing the FMV; this computation is based upon the facts known on the valuation date, to which the principles and standards of the Canadian Institute of Chartered Business Valuators are applied.

Mr. A owns all the issued and outstanding shares of Corporation 1 and Corporation 2 (making them sister corporations). Corporation 1 has a universal life insurance policy with a total death benefit of $2,000,000, and a cash surrender value of $500,000 and has named Corporation 2 as the beneficiary of the entire insurance benefit. Corporation 1 is wholly owned by Mr. A and Corporation 2 is either wholly-owned by Mr. A as well or has Mr. A as the holder of freeze preferred shares and a family trust as the holder of its common shares. When asked to comment on s. 70(5.3), CRA stated:

[S]ubsection 70(5.3) would therefore only have the effect of fixing the fair market value of Mr. A's life insurance policy at its cash surrender value (within the meaning of subsection 148(9)) for the purpose of determining the fair market value of the shares held by Mr. A immediately before his death. Subsection 70(5.3) does not, however, specify the impact of the value of the life insurance policy on the value of the property held by a taxpayer immediately before the taxpayer’s death, nor does it specify how that value is to be allocated among different properties or different classes of shares whose value depends on the life insurance proceeds, if any. The issue of determining the fair market value of shares owned by a person immediately before death and how to allocate the fair market value of a life insurance policy among different classes of shares is a question of fact … .

A corporation holding a life insurance policy on the life of a shareholder receives a policy loan in an amount equal to the full cash surrender value (CSV) of $1 million, which it invests in marketable securities. Pursuant to s. 70(5.3), in determining the FMV of the deceased's shares, the FMV of the policy is its CSV under s. 148(9), which is to be determined without regard to any policy loans – so that such policy’s FMV would be equal to the full FMV of $1 million. However, the FMV of the corporation's other assets will include the $1 million of marketable securities. Will the policy loan be deducted as a liability in determining the shares’ FMV? CCRA responded:

Subsection 70(5.3) specifies that the FMV of the life insurance policy that is to be used in determining the FMV of the deceased's shares is the FMV of that policy within the meaning of subsection 148(9). Consequently, in determining the FMV of the policy as an asset of the corporation, the unpaid amount of a policy loan immediately before the death of the individual on whose life the insurance was purchased is to be ignored. In determining whether the policy loan is otherwise relevant to the determination of the FMV of the deceased individual's shares for purposes of subsection 70(5), the principles that normally govern the valuation process would be applied.

A spousal trust for the widow (Ms. A) of Mr. A held shares of Opco which, in turn, was the owner and beneficiary of a policy that became payable on the death of the survivor of the spouses, so as to fund taxes arising to the trust pursuant to s. 104(4)(a)(i).

CCRA confirmed that s. 70(5.3) could apply to the Opco shares on their deemed disposition pursuant to s. 104(4)(a)(i).

A corporation is the beneficiary of a policy on the life of Mr. X and the lives of others. Mr. X holds “life insurance shares” which entitle the holder to a specified amount from the capital dividend account after Mr. X's death. Upon Mr. X's death, those life insurance shares will be bequeathed to different beneficiaries. CCRA stated:

[S]ubsection 70(5.3) does not specify how to allocate the cash surrender value of the life insurance policy among different classes of shares whose FMV is based on the proceeds of an insurance policy taken out on a person's life. Generally speaking, we are of the view that it would be reasonable to allocate the cash surrender value of the life insurance policy among the classes of shares that give rise to the cash surrender value if the life insurance policy were surrendered immediately before the death of the insured.

Although a life annuity is a life insurance policy which is issued or effected upon the life of a person, it is not a policy under which the life of the person is insured. Accordingly, RC question whether s. 70(5.3) would have application with respect to a life annuity.

What is the process for making a written request to extend the 36-month period under s. 70(6) for the property of the deceased to vest indefeasibly in the surviving spouse or common-law partner or trust, and what should be included in the request?

CRA indicated that a letter should be submitted within the 36-month period which should include particulars including details that will provide the TSO with a clear picture of the reason for the extension request and that CRA will consider the overall reasonableness of the extension request, and whether the duration of the extension is reasonable, based on the barriers faced by the legal representative in having the property vested indefeasibly in spouse, common law partner, or trust.

CRA considers that there is no flow-through to the estate and beneficiaries of safe income attributable to shares where they were deemed to have been disposed of on death for their fair market value (thereby crystallizing that safe income in the shares’ stepped-up adjusted cost base) whereas the safe income does flow through where there was a rollover of the shares under s. 70(6).

The will of the deceased specifies that specified shares are to be transferred to a spousal trust. While the estate assets are being administered, the shares are converted from one class to another. Is the spousal rollover still available? If not, does the gain recognized on the tax return of the deceased have to be amended?

CRA in response stated that at the 2015 APFF Roundtable, Q.9, it had noted that the spousal rollover applies on a property-by-property basis, and the spousal trust must receive the same property that is deemed to have been disposed by the deceased taxpayer. Any property substituted for the property held by the deceased taxpayer would not qualify for the spousal rollover, because the language in s. 70(6) does not refer to substituted property.

Here, where there was a share reorganization, if it was determined that the shares were not transferred or distributed to the spousal trust, or not vested indefeasibly in the spousal trust before that reorganization, the shares would not be eligible for the spousal rollover, so that the deceased would be deemed to have disposed of those shares immediately before death, and to realize a capital gain or loss that would need to be reported on the terminal return.

An executor of an estate, whose residue was bequeathed to a spousal trust, paid the estate debts with liquid assets, transferred 75% of the remaining assets to the pousal trust and retained the balance pending a federal clearance certificate. If the executor chooses to sell or otherwise dispose of some of these retained assets (e.g., retracting preferred shares, or selling land), could the s. 70(6) rollover still apply to such properties on the basis that replacement property of equivalent value was distributed to the spousal trust? CRA responded (TaxInterpretations translation):

[S]ubsection 70(6) applies respecting each property of the deceased individually and could apply to a specific property in the residue of the estate. However, subsection 70(6) applies only if the property that the Spousal Trust receives is the same as the property which was deemed to be disposed of by the deceased immediately before death. …

If an executor, in performing the estate administration, is under an obligation to dispose of property or he exercises his power to dispose of the property… subsection 70(6) is not complied with since the property has not vested indefeasibly in the trust. We consider that a Spousal Trust must ultimately receive the property in order to find indefeasible vesting.

Can s. 70(6) apply to a transfer by a taxpayer both to his or her spouse and a transfer to his or her common law spouse? CRA stated:

…It is possible that a taxpayer could have a spouse and a common-law partner at the same time, for purposes of the Act. For example, in document 2010-037390117 the CRA addressed a scenario where a taxpayer was legally separated but not divorced and had a common-law partner at their death. We were asked, in part, whether paragraph 70(6)(a) would apply to two properties of which one property was bequeathed to the deceased taxpayer's spouse (separated but not divorced) and another property was bequeathed to the deceased taxpayer's common-law partner. Provided all the conditions in subsection 70(6) are met in respect of the deceased taxpayer and the spouse or common-law partner, the subsection would apply to the property transferred to each of the spouse and common-law partner.

Where a taxpayer dies intestate, then provided the property of the deceased is distributed to the beneficiaries in accordance with the shares specified in the applicable provincial law of intestacy, such property will be considered to have been distributed as a consequence of the deceased's death per s. 248(8) even if each type of property is not distributed on a pro rata basis among the beneficiaries. For example, it would be permissible for a surviving spouse to receive, in accordance with such provincial law, all of an RRSP of the deceased that was included in the estate, in order to access the s. 60(l) rollover. The answer implied that appreciated capital property also could be allocated exclusively to a surviving spouse.

Para. 8 of IT-449R (archived) re the effect of a buy-sell agreement on the "indefeasibly vested" requirement is still supportable.

In a situation where, in order to pay debts of the deceased, the executors of an estate sold a portion of the shares which were bequeathed to the testator's spouse, the sold shares did not satisfy the condition of having vested indefeasibly within 36 months of the deceased's death in the surviving spouse and, therefore, were not eligible for the s. 70(6) rollover.

On the death of Y, his co-ownership interest in shares held with his spouse (X) passed to a spousal trust for her following the settling of the estate. Before describing the application of the s. 248(21) or (20) rules to a partition and consolidation of the shares if the co-ownership interests therein had first been transferred to the spousal trust, CRA indicated that s. 70(6) could not apply if the partition of the shares was effected between X and the estate before the transfer of divided shares to the spousal trust, stating:

[T]he property held by Y prior to his death, i.e. the undivided interest in shares, would not be the same property as the property received by the spousal trust in connection with the partition effected by the Estate, i.e. shares.

Does a survivorship clause in a will preclude the application of s. 70(6)? CCRA responded:

Generally speaking … a conventional 30- or 60-day survivorship clause in a will will not, in and of itself, prevent the application of subsection 70(6) if the surviving spouse survives the testator beyond the period provided for in that clause. On the other hand … the provisions of subsection 70(6) will not apply if the beneficiary spouse does not survive the testator within the period provided for in the survivorship clause (i.e. 30 or 60 days, as the case may be), since under a survivorship clause the legacy would be cancelled retroactively in favour of another person.

Where a will provided that the widow was entitled to receive the income of the estate but that her entitlement was "to be terminated upon her death or remarriage", and it is proposed that a court order be obtained removing the remarriage clause, RC will accept that the property of the estate vested indefeasibly in the spouse's trust within the 36-month period only if the court order is made within 36 months of the date of death.

The beneficiary of a testamentary spousal trust renounces all entitlements under the trust (other than income that has accrued to date) without consideration and without having indicated who was entitled to benefit from the renunciation. The residual beneficiaries of the trust, who are prohibited by the trust terms from receiving any distributions during the spouse’ lifetime, obtain a court order to permit distributions to them prior to the spouse’s death. In finding that such trust variation would not alter the application of the s. 70(6) rollover on the initial formation of the spousal trust, or in a current disposition, CRA stated:

[O]nce a trust qualifies as a spouse trust under the terms of subsection 70(6), it remains a spouse trust and is subject to the provisions affecting such trusts (for example, paragraph 104(4)(a)) even if its terms are varied by agreement, legal action or breach of trust. Thus, a renunciation by the spouse after the application of paragraph 70(6)(b) of would not normally call into question the application of that paragraph.

Furthermore, a renunciation, as such, does not result in a disposition of the trust property. The trust remains subject to the application of paragraph 104(4)(a) upon the death of the disclaiming spouse.

Where part of an immovable was distributed to the spouse of the deceased, and the other interests in the immovable were distributed to children of the deceased, CCRA indicated that the s. 70(6) rollover applied to the portion of the property distributed to the spouse.

Before referring to Peardon v. MNR, 86 DTC 1045, RC in its summary stated that "lending or investment of trust property to a non-spouse on 'commercial' terms does not taint the spousal trust but if the terms of the trust permit the lending of trust property to a person other than the spouse on terms more favourable than that [sic] which would otherwise be available to that person commercially, the trust would not be a spousal trust, even if the trustees did not make such a loan."

A transfer of shares of a private corporation made to the surviving spouse after her agreement to assume liabilities of the estate and provide security therefor would not be considered a transfer "under or as a consequence" of the terms of the will of the taxpayer as contemplated in s. 248(8)(a), but, rather, as the result of the agreement between the executors and the surviving spouse.

A discretion accorded by the will to the executors to determine the particular assets to be distributed to the spouse or spousal trust of the deceased would not, by itself, cause the rollover in s. 70(6) not to be available.

In determining whether a by-sell agreement in a shareholders' agreement would result in shares not be considered to vest indefeasibly in the spouse, it would be necessary to determine if any of the terms of the shareholders' agreement could be considered a condition subsequent or a determinable limitation set out in the grant, as discussed in Boger Estate, 93 DTC 5276 (FCA). [Further discussed in 25 January 1994 T.I. 933702 (C.T.O. "Vested Indefeasibly")]

A designation under s. 104(13.1) or (13.2) will not affect the status of a spousal trust.

The spouse is entitled to receive all of the income of the trust only if the sole discretion to receive all or part of the income is in the spouse's hands. However, the spouse may indicate in writing a desire not to receive all or part of it without disqualifying the trust.

Where a bequest to a surviving spouse is made in addition to the surviving spouse's entitlement under the Family Law Act (Ontario), two valid spouse trusts may be created.

Where a deceased taxpayer's surviving spouse receives property from the estate pursuant to his or her equalization right, the property will be considered to be transferred as a consequence of the death of the deceased. However, where the surviving spouse reaches a settlement with the executors and property is transferred to the surviving spouse in consideration for a release of his or her rights to make a claim under the Family Law Act for an equalization and net family property, the rollover is not available.

Where the surviving spouse has the right to put the shares of the deceased to the other shareholders, and the other shareholders have a call right, RC generally considers the shares to have become vested indefeasibly in the spouse if they are transferred to her before either option is exercised.

A clause in a will empowering the executors determine whether a particular receipt was on income or capital account serves only to facilitate the administration of the estate and does not give arbitrary powers to the executors. Accordingly, the trust is not tainted from being a spouse trust.

After reconsidering its technical interpretation of 7 December 1989, RC was of the view that a designation under s. 104(13.1) or (13.2) and the payment of the resulting taxes out of the trust income, will not affect the status of a trust described in s. 70(6)(b) or 104(4)(a).

Where a trust pays the tax liability out of trust income resulting from an s. 104(13.1) designation, the requirements of s. 70(6)(b)(i) will not be met. However, the payment of the tax out of taxable capital gains of the trust will not in and of itself preclude the trust from qualifying.

A spousal trust will be created where the will directs the establishment of a trust for a spouse that leaves total discretion to the executor to determine the total value of the properties to be transferred to the trust, and the specific properties to be transferred.

A s. 70(6) election cannot be made in respect of a fractional interest in a property For these purposes each share of a corporation, and all of the taxpayer's interest in a partnership, constitutes a single property of the taxpayer. As each share is a separate property, a s. 70(6.2) election can be made for any number of the deceased taxpayer's shares; whereas it cannot be made with respect to a portion of the deceased taxpayer's partnership interest.

A deceased person held an interest in a family farm partnership. Can the executor elect to have s. 70(6) apply to only a portion of the partnership interest? After noting that “a partnership interest, even if it is represented by the holding of units with or without identical rights, constitutes a single property of the partner,” CRA stated:

[S]ubsection 70(6.2) does not provide for an election in respect of only a portion of a property. Consequently, a legal representative cannot elect under subsection 70(6.2) only in respect of the portion of the interest in a family farm partnership.

This contrasted with qualified small business corporation shares, for which the election could and was required to be made in respect of a particular number of shares.

RC allows election to be made in respect of a fraction of the total number of identical shares owned by the deceased taxpayer.

Mr. A, whose adult children also are Canadian residents, operates non-adjacent farms, some owned directly, and the others (also located in Canada) held through wholly-owned Canadian-controlled private corporations as their only asset. Mr. A works full-time on his farms and provides direct hands-on management of all of the farming operations. Does 2008-030376lE5 respecting the ownership of, or work activity associated with multiple farm properties continue to apply respecting his ability to transfer properties pursuant to ss. 70(9.01) and (9.21) - and would it extend to inter vivos transfers under ss. 73(3.1) and (4.1)? CRA stated:

[T]he fact that Mr. A owns multiple farm properties and farm corporations, would not, in and of itself, limit his ability to transfer the properties pursuant to subsections 70(9.01) and 70(9.21) of the Act. Nor would the fact that Mr. A works on more than one farm, in and of itself, lead to a conclusion that he was not actively engaged on a "regular and continuous basis" on any of the farms.

..[W]here the transfer of multiple properties pursuant to subsection 70(9) and/or subsection 70(9.2) is contemplated, it will be necessary to separately determine, for each property, whether the conditions noted above are met.

Upon the death of their father (Mr. X), Sons A and B received a devise of the farm that he had actively farmed until his death, but which was not farmed by them. Alternatively (in Scenario 2), Son A carried on the farming business for a number of years before Mr. X’s death. After summarizing the conditions in s. 70(9), CRA stated:

Provided that the conditions for the application of subsection 70(9) are satisfied, we are of the view that, in both Scenario 1 and Scenario 2, the transfer of Mr. X's farm property to his children on his death would be governed by the provisions of subsection 70(9.01).

Does s. 69(11) apply where s. 70(9.01) applies? CRA responded (TaxInterpretations translation):

Whether or not the taxpayer's legal representative elects, subparagraphs 70(9.01)(a)(i) and 70(9.01)(b)(i) both provide that section 69 does not apply to the taxpayer or to the child in respect of the property. Consequently,…section 69, which includes subsection 69(11), will not apply in a situation where subsection 70(9.01) has application.

A shareholders' agreement gives children the right to acquire the shares of a farm corporation for $1 after their father's death. If the children exercise their right to purchase, are those shares transferred or distributed to the children as a consequence of the father's death for the purposes of subsection 70(9.2)? CRA responded:

[T]he acquisition of the shares by a child would be a result of the exercise of the right to purchase arising on death, and not be a consequence of the death of the father. Consequently, subsection 70(9.2) would not apply …