NOTE: TAX PRACTICE CLEARANCE CERTIFICATES RETURNS. RRSP's, RRIF's, EPSP's, DPSP's, RPP's AND RETIRING ALLOWANCES SECTION 164

Transcription

1 TAX PRACTICE I CLEARANCE CERTIFICATES II RETURNS III RRSP's, RRIF's, EPSP's, DPSP's, RPP's AND RETIRING ALLOWANCES IV SECTION 164 NOTE: Reference to Section numbers, unless otherwise noted, are to the Income Tax Aot (Canada). By: J. Mark MoCrea, Partner & Jade A. Spalding, Artioling Clerk PATTERSON KITZ

2 I. CLEARANCE CERTIFICATES OVERVIEW: A Clearance Certificate certifies that all taxes, Canada Pension Plan contributions, Unemployment Insurance premiums, interest and/or penalties assessed and chargeable or payable out of any property of the deceased as at a point in time have been paid or that security for payment has been accepted by the Minister. Subsection 159(2) of the Income Tax ~ requires that certain persons acting in a representative capacity obtain a Certificate before distributing property under their control. Subsection 159 (3) may impose personal liabili ty for unpaid taxes on the person who distributes' property without obtaining the required Certificate. More specifically, Subsection 159(2) applies to every person (referred to as the "responsible representative") who is administering, winding up, controlling or otherwise dealing with the property, business or estate of another person. A responsible representative is defined to include an assignee, liquidator, receiver, receiver-manager, administrator, executor or other like person (a Trustee in Bankruptcy is specifically excluded). The winding up of an Estate which involves the distribution of property to beneficiaries of the estate triggers the application of Subsection 159(2) and a Certificate or Certificates are required. The Certificate is to cover all amounts for which any taxpayer is liable under the Act for any

3 - 2 - prior taxation year and the taxation year of the distribution for which the responsible representative is or can be expected to become liable in his capacity as the responsible representative. The reference to amounts owing by any taxpayer is extremely wide but it is intended to cover specifically the tax liability of the person over whose affairs or property the responsible representative has control. Depending on the specific circumstances, one of the following three forms of Clearance Certificates will be issued by Revenue Canada, Taxation: (a) (b) (c) Form TX21-A for years prior to death and for the period ending with the date of deathi Form TX21-B for partial distributions of propertyi Form TX21 (issued only once) for final distribution of all property. [Forms TX21-A and TX21-B need not be obtained prior to obtaining Form TX21.] When a person dies it is usually necessary to file a tax return for the taxation year of death (e. g. usually January 1 to the day of death in that calendar year) plus, on occasion, a tax return or returns for prior taxation years. In these or similar circumstances, the executor would usually file these returns, along with a written request for a Clearance Certificate to date of death (see form TX19 attached). Assuming that all amounts owing by the deceased taxpayer have been paid, or the proper security has been posted, Revenue Canada, Taxation would then issue a "Clearance

4 - 3 - Certificate to Date of Death" (see form TX21-A attached) to the estate. After receiving this Certificate the executor would continue to administer the estate, by distributing the property of the deceased to the beneficiaries (or the heirs at law if the person died intestate). One other Certificate that should be requested by the executor is a "Clearance Certificate For Final Distribution" (see form TX21 attached), which is requested in writing (form TX19) at the time the last estate tax return is filed with Revenue Canada, Taxation. When requesting this Certificate an undertaking of the executor should be filed. This provides that the executor will complete the actual distribution of the property in accordance with the intended scheme of distribution as soon as possible after the Certificate has been issued. A Clearance Certificate cannot be issued until all requisite income tax returns have been filed and assessed, and all taxes, contributions, interest and penalties have been paid or secured. For this reason, a request for a Clearance Certificate should not be made until after the Assessment Notice for the final return has been received. This also applies to a T3 Trust Return when income has been taxed in the hands of the Trust. Requests for Clearance Certificates will only be accepted by Revenue Canada, Taxation if the prescribed form TX19 is

5 - 4 - completed (together with required documents as stated therein) and submitted by the personal representative to the Business Audi t Section of the appropriate District Taxation Office. Once the Certificate is issued, the Department considers the chosen date to be the actual date of distribution for tax purposes and regards the estate or trust representative as holding the properties on behalf of the beneficiaries since that date. The following documents have been attached for your convenience: (1) TX19 - Request for Clearance Certificate; (2) TX21-A - Clearance Certificate (to date of death); (3) TX21 Clearance Certificate distribution); (for final (4) Interpretation Bulletin Certificates"; and IT-282R "Clearance (5) Information Circular 82-6 "Requesting Clearance Certificates for Estates and Trusts".

6 1+1 Revenue Canada Taxation Revenu Canada Impot REQUEST FOR CLEARANCE CERTIACATE ThiS form IS to be u~ed where the "responsible representaflve" for an estate. business or property IS requesnng a dearance certificate as required by subsection 159(2) of the Income Tax Act. Responsible representatve means the executor. administrator. trustee or Similar person other than a trustee in bankruptcy FOR DEPARTMENTAL USE ONLY For more Information. see the current version of IC Requesting Clearance Certrtlcates for Estates and Trusts. IT-282. Estate or Trust Distributions - Clearance Certificates or IT-368. Corporate Distributions - Clearance Certificates. This fonn should not be sent to the Department uml: 1 All required retums are filed and assessed. 2. All taxes. contnbutions. Interest and penalties have been paid or secured. This form IS to be sent to the Business Audit Section at the dlstnct taxation office of the responsible representatve. not the taxa~on centre. Name of Taxpayer IDENTIFICATION AREA Address SoCIal Insurance Number. Corporabon Account Number or Trust Number as applicable Date of Birth Date of Death Name of Responsible Representatve Attention Address CapacIty of Above Note: n there IS more than one responsible representatve. attach a separate list Telephone Number ( ) Tl "ordinary retum" Tl "rights and things" Tl "trust income" T 1 "business Income" T2 Corporation Retum T3 Trust Retum Other (speaty): Type of Retum ( J applicable box(es) rt filed) D D D D D D RETURNS FILED Pened Covered Date of Notice of Assessment, ADDITIONAL INFORMATION REQUIRED Date chosen for Winding up the trust or corporabon and dlstnbu1ion of asset<; Clearancecertrticaterequested( J one): TX21 FINAL D TX21ADEATH D TX21BPARTIAL D Attach, If applicable and not prevtously provided: 3D 4 0 so 6 0 Copy of the Will (codicil. renunclanons. andlor disclaimers) and all probate documents. Where the taxpayer died Intestate. attach details of the proposed dlstnbutlor assets. name. address and S.I.N. of each benefiaary and relationship to the deceased. Copy of Trust Document. Statement showing the assets and distribution plan. For each asset. provide description. adjusted cost base and fair market value at date of death or distnbutior case of a partjal dlstributon. the assets intended for dlstributon Should be Idemned. Letter of aulhonzaton allowing Revenue Canada. T axaton to communicate With the responsible representatve about the taxpayer's affairs, CERTIFICATION AND UNDFRTAKING In my capacity as the (eg. executor. administrator. trustee) of the taxpayer named In the IDENTIFICATION AREA. I am requestj dearance certrtlcate from the MInister certjfylng that all amounts for which that taxpayer IS liable under the Income Tax Act in respect of the taxation year In which the dlstnbl IS made. or any preceding year. have been paid or that secunty for the payment has been accepted by the Minister. I undertake to complete the actual dlstnbubon of all 0 property as soon as possible after the dearance certjficate IS received. Date Signature Fonn prescnbed by order of the Minister of Nabonal Revenue (Franc;aIS au 1 [Next page is F1641]

7 II. RETURNS OVERVIEW: Filing tax returns for the deceased and the estate is strictly the responsibility of the deceased's personal representative. If the assets of the estate have been distributed, and the estate then has insufficient funds to pay the taxes which are owed, the legal representative will be personally liable for any shortfall and for any interest or penalties incurred. rely on the estate Most personal representatives, however, solici tor to advise which returns are necessary or to recommend someone else who will carry out this function and prepare the returns. It is important that the solici tor has an understanding of the general concepts of taxation on death if only to recognize that it may be an area which should be delegated to a professional advisor who will prepare the requisite returns in a proper and timely fashion. The personal representative may be responsible for filing up to four returns in the year of death, in addition to any returns not filed by the deceased in previous years. The number of returns filed depends on whether any of the elections available under the Income Tax Act are exercised, and on the different types of income which the deceased may have received. If an executor or trustee does not file the returns as required, there may be penalties under Section 162 of the Act.

8 ORDINARY RETURN(S): Provided all previous years' returns have previously been filed, the first return to be filed is an "ordinary" individual income tax return reporting the income from January 1 of the year of death to the date of death. The required return is usually a T1 General Income Tax Return, which is often referred to as the "terminal" return, the "final" return, or the "stub" return. Section 70 of the Act contains special rules for determining the income of a deceased taxpayer for a period prior to his or her death. See also Interpretation Bulletin IT-210R, attached. [Filinq Deadline if spousal trust oreated - 18 months after date of deathi If no spouse trust - the later of six months following the date of death or April 30 of the year following death. Interest runs from the date the return is due.] 2. SEPARATE RETURNS: In certain circumstances the legal representative has the opportunity to exclude specific types of income from the "ordinary" return and report them on a separate income tax return as if the taxpayer were "another person ll, (see Interpretation Bulletin IT-326R2 attached). These special returns are permitted by the Act to provide for a reduction or deferral of tax:

9 - 3 - (i) Special Return for "Rights or Things": If the deceased owns certain "Rights or Things" as referred to in the Act, the personal representative may elect to file a separate return including their value, and in certain circumstances, some or all of the "Rights or Things" may be transferred directly to the beneficiary or beneficiaries and included in their income (subsections 70(2) and (3». "Rights or Things" include property other than capital property, which has been earned or is payable but which has not actually been paid at the taxpayer's death (see Interpretation Bulletin IT-212R3 attached). "Rights or Things" include, for example, dividends declared but unpaid, unused vacation leave credits, and the inventory of a farmer who reports income on a cash basis. Filing a separate return provides the estate with another standard set of tax credits and deductions as if it were another person, whereas transferring them directly to a beneficiary or beneficiaries achieves income splitting and/or tax deferral. [Filing Deadline: later of one year after the date of death and 90 days after the mailing of the Notice of Assessment regarding the final return]. Where a "Rights or Things" Return is filed, the personal representative may file an Election T2075 to pay the tax

10 - 4 - in equal instalments over a period of 10 years, provided satisfactory security has been posted (subsection 159 (4) ). (ii) Return for Income from Partnerships and Proprietorships: If the deceased operated a business which was not on a calendar year basis and died after the close of the fiscal year, the personal representative may elect to file a separate return reporting the business income from the fiscal year end to the date of death as if the taxpayer were II another person II (see SUbsection 150 (4) and Interpretation Bulletin IT-326R2 attached). Full personal tax credits and portions of other deductions may be claimed in this return. [Filinq Deadline: later of six months after date of death or April 30 of the year following death]. (iii) Return for Income from Trusts: If the deceased was an income beneficiary of a testamentary trust in a taxation year which ended in the calendar year and before the deceased's death, a separate return may be filed including the income from the close of the trust's fiscal year to the date of death (subsection 104 (23) (d) and see Interpretation IT-326R2 attached). You can claim full personal tax credits and portions of other deductions in this return. [Filinq Deadline: the later of six months after the date of death or April 30 of the year following death].

11 - 5 - PAYMENT OF TAX AND PENALTIES FOR LATE FILING; Interest is due at the interest rate set by the Minister per annum on the unpaid balance of taxes owing. The penalty for late filing is 5% of the unpaid tax at the date the return was due to be filed plus 1% of the unpaid balance for each full month that the return was late being filed (but not exceeding 12 months) (Section 162).

12 III. RRSP's. RRIF's, EPSP's. DPSP's & RETIRING ALLOWANCES: Registered retirement savings plans (RRSPs) are a device used to encourage individuals to save on a tax-deferred basis. The general advantage of a registered plan is that the taxpayer may deduct the premiums paid to a plan when computing his or her income for that year. Income earned each year in the plan is not subject to tax in that year. When the accumulated premiums and accrued earnings are eventually paid out they will be included in income at that time. Eventually, not later than the end of the year in which the individual contributor turns 71, the plan must adopt or be converted into a payout mechanism in the form of an annuity or registered retirement income fund (RRIF), with all payments taxable as received. A certain measure of income splitting is also permitted through the device of a "spousal RRSP". It is very important to ensure that the proceeds of a RRSP are paid out in accordance with the most recent valid designation (whether by will or within the RRSP instrument). For a general discussion on RRSP's see Information Circular 72-22R7 (copy attached). A. Treatment of Proceeds where Deceased dies prior to Maturity of Plan: i. RRSP Benefits passinq to persons other than the deceased's spouse or dependent children In circumstances where RRSP benefits pass to named beneficiaries other than the deceased's spouse or dependent

13 - 2 - children l the fair market value of all the property of the plan must be included in the deceased's income for the year of death. 2. RRSP Benefits passinq to the Spouse: Where the benefits under a RRSP of a deceased person pass directly to a spouse the payment qualifies as a "refund of premiums" and the amount paid out of the RRSP to the spouse is taxed in the hands of the spouse and is not included in the deceased's income. The spouse receiving the RRSP proceeds has a number of options: 1). pay tax on the proceeds; 2). defer taxation by transferring the RRSP proceeds to his or her own RRSP in the year of receipt or within 60 days after the end of the year l deducting the amount transferred from his or her income l or; 3). transfer l tax free l the proceeds to a life annuity or an annuity to age 90 when the spouse l who is the named beneficiaryi has turned 71 before the end of the year. [After attaining 71 years of age a taxpayer cannot have a RRSP]. 3. RRSP Benefits passinq to the Estate: Where the amounts payable under the RRSP of a deceased are paid to the estate of the deceased l the amount paid is included in the deceased's income for his or her final T1 General return. However I if the spouse is a beneficiary of the estate l the legal representative of the deceased and the spouse may file a joint election (See form T2019 attached) I so that all

14 - 3 - or a portion of the RRSP proceeds paid out are deemed to have been received as a refund of premiums by the spouse. 4. RRSP Benefits passing to the deceased's Dependent Children or Grandchildren by Designation or through the Estate: Subject to certain limitations, where an annuitant dies and his or her RRSP proceeds are paid to a dependent child or grandchild, all or a portion of the amounts may qualify as a "refund of premiums" and be taxed in the hands of the beneficiary (with any balance being taxed in the hands of the deceased). In order to qualify, the annuitant may not be survived by a spouse and the child or grandchild must have been "dependant" on the deceased. Where RRSP proceeds are paid to the estate and the child or grandchild is a beneficiary, the personal representative of the estate and the legal representative of the child may file a joint election that all or a portion of the amount received by the estate be deemed to be a refund of premiums. The amount elected can then be deducted from the income of the deceased. [Note: the options available to a child or grandchild who receives a refund of premiums are limited. Only children or grandchildren dependent because of physical or mental infirmities are entitled to defer tax by the purchase of an annuity].

15 - 4 - B. Treatment of Proceeds where Deceased Dies after Maturity of ll.a.n: 1. Annuity Benefits (Other than RRIF) passinq to persons other than the deceased's spouse or dependent children: Where a deceased RRSP has matured prior to death, annuity payments which do not pass to the spouse or dependent children must be commuted and the value included in the deceased's income for the year of death. 2. Annuity Benefits (Other than RRIF) passing to deceased's spouse: Where the spouse was the designated beneficiary, the annuity payments are payable directly and the spouse becomes the annuitant. The amounts paid are included in the income of the spouse as received. Where the estate is entitled to receive amounts out of or under the RRSP for the benefit of the deceased's spouse, the spouse and the legal representative may file a joint election (See Form T2019 attached) that the spouse shall be deemed to have become the annuitant. If the deceased's will does not specifically allocate these benefits to the spouse, there should be no problem if the spouse's beneficial interest in the estate is sufficiently large. 3. Annuity Payments (Other than the RRIF) passinq to the deceased's dependent child or grandchild: Where the commuted value of the annuity payments are payable directly to a dependent child or grandchild as a result of being so designated, the amounts paid and which qualify as a refund of premiums are included in their income and not in

16 - 5 - the deceased income for the year of death. If the dependent child or grandchild is suffering from physical or mental infirmity, tax may be deferred by the purchase of an annuity. If the proceeds of the matured RRSP are paid to the estate in circumstances in which all or part would qualify as a refund of premiums if paid directly to a dependent child or grandchild, the personal representative and the beneficiary can file a joint election (see Form T2019 attached) that all or a portion of the proceeds received are deemed to be a refund of premiums to the child or grandchild. Such an elected amount would than be taxed in the beneficiary's hands. Any amount not qualifying as a refund of premiums will be taxed in the hands of the deceased. C. Reqistered Retirement Income Fund (RRIF): Upon maturity of a RRSP, the annuitant may purchase a life annuity, a fixed term annuity to age 90, a Registered Retirement Income Fund (RRIF), or bring the entire proceeds of the RRSP into income and pay the tax thereon. [Note: if a life annuity is chosen with no guaranteed term, the annuity payments cease on death]. A RRIF (subsection 146.3(1» is a type of annuity which lasts until the annuitant reaches the age of 90, (see Information Circular 78-18R4). On the purchase of a RRIF the annuitant may (subject to the relevant provincial legislation), elect that on their death his or her spouse is to become the

17 - 6 - annuitant. The annuitant may also provide in his or her will that their spouse is to become the annuitant. In the event that no such election has been made, the annuity payments must be commuted and the value included in the deceased's income for the year of death. Generally, all amounts received out of or under a RRIF are received as income. There are, however, a number of exceptions, a few of which have been dealt with below: 1. RRIF benefits passinq to deceased's spouse: In circumstances where the deceased has elected to have the spouse become the annuitant, payments made after death are included in the income of the spouse as received and there is no inclusion in the deceased's income. In situations where no such designation has been made but the deceased has designated the spouse in the Will to be a beneficiary of the RRIF proceeds on death, the proceeds are included in the spouse's income and are not included in the deceased's income. 2. RRIF benefits passinq to the deceased's dependent child or qrandchild: Where the commuted value of the RRIF is designated as being payable directly to a dependent child or grandchild, those amounts which qualify as a refund of premiums are calculated in their income. If ~he proceeds of the RRIF are paid to the estate in circumstances in which all or part would qualify as a refund of premiums if paid directly to a dependent child or grandchild, the personal representative and the

18 - 7 - beneficiary can file a joint election (see Form T2019 attached) so that all or a portion of the proceeds received are deemed to be a refund of premiums to the child or grandchild. The amount which qualifies as a refund of premiums is then taxed in the beneficiary's hands. P, Employment Related Plans and\or Retirinq allowances: Today, the legal representative of a deceased will often be called upon to deal with a number of different types of employment related financial plans: retiring allowances; company pension plans; employee profit sharing plans; deferred profit sharing plans; and, registered pension plans, being just a few examples. 1, Profit Sharinq Plans; An employee profit sharing plan (EPSP) is an arrangement under which an employer pays a portion of the profits from the business to a trustee to be held and invested for the benefit of his or her employees who are members of the plan (subsection 144(1». A deferred profit sharing plan (PPSP) (subsection 147(1» is basically the same type of arrangement, the principal distinction being that the members of an EPSP pay tax each year on the contributions and trust income allocated to them (subsection 144(3», whereas in a DPSP members pay tax only as the amounts are actually received from the trust (subsection 147(10». Since there is no deferred tax feature

19 - 8 - to an employees profit sharing plan, such plans are, in general terms, a form of employer-sponsored savings program. As a general rule when the member (employee) of a DPSP (or the member's estate or beneficiary) receives a distribution from the plan the amount is fully taxable (Subsection 247(10). As is often the case, a number of exceptions to the general rule exist. The most important of which relate to distributions from the plan of shares of the employer corporation, or a related corporation, where the amount is used to purchase an annuity (subs. 147(10) and 147(2) (k) (iii» or where the member (or surviving spouse) transfers the amount directly to an RRSP, registered pension plan or another DPSP (subs. 147(19) to (21). A lump sum may be transferred directly to any of these plans on behalf of the surviving spouse of the employee if he or she becomes entitled to the amount as a result of the death of an employee, on a rollover basis. 2. Reqistered Pension Plans: The registered pension plan (RPP) is the oldest of the deferred income pension plans and has the least formalized statutory structure. Providing that the plan meets the definition of "Registered Pension Plan" as set out in subsection 248 ( 1), contributions by employers within prescribed limits will be deductible and the plan's status will remain tax deferred. A "Registered Pension Plan" is defined in subsection

20 (1) to mean a pension plan that has been registered by the Minister for the purposes of the Income Tax Act, whose registration has not been revoked (See Information Circular No R7). While the registration of a pension plan under the Income Tax Act is not compulsory, it is required in order to obtain the maximum tax benefits. [Note: Pension plans are also regulated by other Federal and Provincial Legislation.] Under most pension plans there is the option of designating a beneficiary or leaving the proceeds to the plan holders estate. It is, therefore, important to review the terms of the will, if any, to see if there has been a subsequent revocation of the designation under the plan. In order to be an effective revocation, it must be later than the earlier designation and must refer expressly to the plan in question. Taxation of Registered Pension Benefits: As with benefits received from an RRSP, all amounts distributed from a RPP are included in the recipient's income in the year they are received (subparagraph 56(1)(a)(i)). The full amount of the benefit will be included whether or not all the recipient's contributions to the plan were deductible and irrespective of the benefit's possible source in a capital gain or a dividend received by the plan. Unlike the general rule with respect to amounts in a RRSP at the time of the

21 annuitant's death, amounts payable out of a RPP are taxed to the recipient and are not included in the employee's income for the year of death. Lump sum amounts may in some circumstances be transferred by the recipient tax free directly from a RPP to another RPP or retirement savings plan (see subsections 147.3(5) to (8) and 147.3(1) and (4) to (7». After the death of the employee lump sum payments under a pension plan will not usually give rise to any income for the deceased in his or her terminal year. Where, however, immediately prior to death, the deceased had power to collapse a pension plan, Revenue Canada has stated that it will not object if the personal representatives wish to treat a lump sum payment upon death as a "right or thing" which is subject to subsections 70 (2) and (3) (see Interpretation Bulletin IT- 212R3). Amounts payable out of a RPP to a recipient must be included in the recipient's income. A number of options are available. If the recipient is the estate of the employee, subsection 104(28) permits the personal representative to designate a beneficiary to whom the amount was payable in the year as an "eligible amount" (paragraph 104(27)(d». The significance of this provision is that it is possible to continue the tax deferral provided by a RPP if an amount received from the plan, as a lump sum is transferred to a RRSP or into another RPP (subsection 60 (j» in the year. I f the

22 particular beneficiary was a spouse of the individual upon and in consequence of whose death a testamentary trust arose, the amount will qualify in the hands of the spouse for the pension credit under subsection 118(3). Deferral is also possible for the 1989 and subsequent taxation years where lump-sum payments (not including actuarial surplus) out of a RPP are received by a taxpayer as a consequence of the death of an individual of whom the taxpayer is a child or grandchild to the extent that such are applied to acquire an annuity for the taxpayer which will not extend beyond the year the taxpayer reaches 18. Amounts received by a trust and designated under paragraph 104(27)(e) as a "beneficiary's share" of the benefit will also qualify for this deduction from income see subparagraph 60(1)(ii)(B».

23 Retiring Allowances: Amounts received by a former employee arising out of or in consequence of the termination of employment are usually included as income from that employment under subsection 5(1) alone or together with paragraph 6 (3) (b) or, as a retiring allowance under subparagraph 56(1)(a)(ii). II Retiring Allowance" is defined in subsection 248(1) to mean an amount (other than a superannuation or pension benefit and, after November 12, 1981 an amount received as a consequence of a death of an employee) received upon or after retirement from an office or employment in recognition of long service or in respect of a loss of office or employment. Its meaning was extended, applicable with respect to any termination of an office or employment after November 12, 1981, to include any amount received in respect of a loss of office or employment whether or not received as, on account or in lieu of payment of damages or pursuant to an order or judgement of payment of damages or pursuant to an order or judgement of a competent tribunal. To be a retiring allowance, the payment must be received upon or after retirement or be paid in respect of a loss of an office or employment. Under subparagraph 56(1)(a)(ii) retiring allowances are included in computing the income of the taxpayer as they are received. Even though the definition of retiring allowance indicates that it is an amount received by lithe taxpayer or, after his death by a dependent

24 or a relation of the taxpayer or the legal representative of the taxpayer", it is the Department's view that an amount paid in respect to a retiring allowance constitutes income of the office or employee during his or her lifetime regardless of who actually receives the payment. However, should the employee retire and then die prior to receiving all of the retiring allowance to which the deceased was entitled, any payments subsequent to the time of death in respect to the unpaid retiring allowance made to a dependent, relation or legal representative of the employee will normally be included in the recipient's income as a retiring allowance pursuant to subparagraph 56(1)(a)(ii). As an alternative, the Department will allow the value of any retiring allowance yet to be received at the time of death to be included in the employee's income for the taxation year of death as a "Right or Thing" pursuant to subsection 70(2). An exception to the taxation of the immediate recipient of a retiring allowance is provided in subsection 104(28), whereby such an amount or portion thereof received in taxation years ending after November 12, 1981 by a testamentary trust is deemed not to have been received by the trust but by the beneficiary to whom it may reasonably be considered to be paid or payable. [Note: Retiring allowances recei ved by the retiree (or, after death by a dependent, relation or the deemed recipient under Subsection 104 (28) ) which are transferred to a registered pension fund or plan or

25 to a registered retirement savings plan under which the recipient is the annuitant are also opened to certain limited tax deductions]. For a further discussion see Interpretation Bulletin 337R2.

26 IV. SECTION 164 Where in the course of administering the estate of a deceased taxpayer, the personal representative intends to dispose of a capital property, he or she should first be familiar with SUbsection 164(6). In certain circumstances it may be used, and an election made, to effectively avoid double taxation in respect of the terminal year of the deceased and the first taxation year of the estate. An example of where an election under subsection 164(6) may be used is the situation where a person dies owning the shares of a private corporation. Assume, for various reasons, the person's capital gain exemptions are not available to fully shelter the capital gain on the deemed disposition and, there are no roll-over provisions that are applicable. In addition assume the assets within the corporation are to be sold and the proceeds distributed among or between certain beneficiaries. In such circumstances, without subsection 164(6), there would be a deemed disposition and a capital gain in the terminal year, another capital gain in the corporation when its assets are sold and, on the winding-up and distribution of the proceeds to the beneficiaries, a deemed dividend to the estate. Provided the personal representative causes the corporation to be wound-up during the first taxation year of the estate (thereby stripping-out the assets of the company), there would be a capital loss on the winding-up which could then be carried back into the terminal year (with the election

27 - 2 - under subsection 164(6». Effectively the inherent value (capital gain) of the corporation would then have been only taxed once (as a deemed dividend), in the hands of the estate upon the winding-up of the corporation. p: \j fm\tax. pap