23 November 1999 Internal T.I. 9917117 - GRAIN INVENTORY

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the Department.

Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle du ministère.

Principal Issues: It is not clear from the written enquiry whether the farmer reported income on his XXXXXXXXXX return pursuant to paragraph 28(1)(b) or whether the farmer claimed a deduction on his XXXXXXXXXX return pursuant to paragraph 28(1)(f) so we have discussed the tax consequences in both of these two scenarios.

1) An individual who was a farmer claimed an optional inventory adjustment of $XXXXXXXXXX on grain inventory on his XXXXXXXXXX tax return, pursuant to paragraph 28(1)(f) of the Act. The individual died in XXXXXXXXXX and the value of the grain on the date of death was $XXXXXXXXXX . Can $XXXXXXXXXX of the value of the grain be included in income on the final return of the deceased and can the remaining $XXXXXXXXXX be reported on an elective subsection 70(2) return? Alternatively, can the paragraph 28(1)(f) optional inventory deduction of $XXXXXXXXXX be claimed on the subsection 70(2) return if the value of the grain ($XXXXXXXXXX ) is reported on the subsection 70(2) return?

2) An individual who was a farmer reported income of $XXXXXXXXXX on grain inventory on his XXXXXXXXXX tax return, pursuant to paragraph 28(1)(b) of the Act. The individual died in XXXXXXXXXX and the value of the grain on the date of death was $XXXXXXXXXX . Can $XXXXXXXXXX of the value of the grain be included in income on the final return of the deceased and can the remaining $XXXXXXXXXX be reported on an elective subsection 70(2) return? Alternatively, can the paragraph 28(1)(f) optional inventory deduction of $XXXXXXXXXX be claimed on the subsection 70(2) return if the value of the grain ($XXXXXXXXXX ) is reported on the subsection 70(2) return?

Position:

1) The taxpayer's legal representative can choose to elect to file a 70(2) return and report the $XXXXXXXXXX value of the inventory at the date of death on the 70(2) return. The total value of all the deceased taxpayer's rights or things has to be reported on the 70(2) return (other than rights or things transferred to beneficiaries within the time provided by 70(3)). No portion of the value of the rights or things is to be reported on the taxpayer's final XXXXXXXXXX T1 return for the year of death. The taxpayer included the value of inventory ($XXXXXXXXXX ) in income pursuant to paragraph 28(1)(b) for the XXXXXXXXXX taxation year and claimed a corresponding deduction ($XXXXXXXXXX ) pursuant to paragraph 28(1)(f) for the XXXXXXXXXX taxation year. Therefore, no further amounts are required to be reported or deducted on the deceased's final T1 return for the year of death in respect of the optional inventory adjustment.

2) If the legal representative chooses not to file a separate 70(2) return, a deduction under paragraph 28(1)(f) would be claimed for $XXXXXXXXXX on the deceased's XXXXXXXXXX final return and the total value of the grain inventory of $XXXXXXXXXX would also be reported as income on the deceased's XXXXXXXXXX final return. If the taxpayer's legal representative chooses to file an elective 70(2) return, then the total value of the grain inventory of $XXXXXXXXXX must be reported on the 70(2) return and a deduction for $XXXXXXXXXX pursuant to paragraph 28(1)(f) could be claimed on the deceased's XXXXXXXXXX final return.

Reasons:. As indicated in paragraph 2 of IT-212R3, Income of Deceased Persons - Rights or Things, where a taxpayer at the time of death had rights or things which, when realized or disposed of, would have been included in computing income, subsection 70(2) requires the value of such rights or things at the date of death to be included in computing income for the year of death. Subsection 70(2) includes in income amounts that have been earned but have not been included in income such as amounts in respect of which an amount has been deducted in computing income such as a "cash basis" inventory. Paragraph 20 of IT-212R3 indicates that if a separate subsection 70(2) return is filed, it must include the total value of all the deceased taxpayer's rights or things other than those transferred to beneficiaries within the time provided by subsection 70(3) of the Act. Accordingly, the taxpayer's legal representative can choose to elect to file a subsection 70(2) return within the time period permitted, as set out in that provision, and report the full amount of the value of the grain inventory of $XXXXXXXXXX on the subsection 70(2) return. By virtue of subsection 70(2), the taxpayer's legal representative cannot choose to report only part of the value of the grain inventory on the subsection 70(2) return. In addition, if an election is made by the taxpayer's legal representative to file a subsection 70(2) return, all of the taxpayer's rights or things have to be reported on that return.

		November 23, 199

M. Towpich	HEADQUARTERS
	Calgary Tax Services Office	G. Moore
		952-1506
		7-991711

Grain Inventory - Subsection 70(2) Rights or Things

We are writing regarding your memo of June 17, 1999, concerning the income tax treatment of the fair market value of grain inventory in the year of a farmer's death.

You have stated that an individual who was a farmer claimed an optional inventory adjustment of $XXXXXXXXXX on grain inventory on his XXXXXXXXXX tax return, pursuant to paragraph 28(1)(f) of the Income Tax Act (the "Act"). The individual died in XXXXXXXXXX and the value of the grain on the date of death was $XXXXXXXXXX. You are asking whether $XXXXXXXXXX of the value of the grain can be included in income on the final return of the deceased and the remaining $XXXXXXXXXX be reported on the subsection 70(2) return as a rights or things. Alternatively, you are asking if paragraph 28(1)(f) optional inventory deduction of $XXXXXXXXXX can be claimed on the subsection 70(2) return if the value of the grain ($XXXXXXXXXX) is reported on the subsection 70(2) return.

OUR COMMENTS

As you know, paragraph 28(1)(b) of the Act permits farmers who have elected to compute their income in accordance with the cash method to add to their income for a taxation year an optional inventory adjustment. This adjustment may be used to reduce a farmer's loss. The adjustment cannot exceed the fair market value of the inventory owned in connection with the farming business at the end of the year less any mandatory inventory adjustment determined under paragraph 28(1)(c) of the Act. Paragraph 28(1)(f) provides that the amount added to income in a year under paragraph 28(1)(b) must be deducted in computing income for the following year. Subsection 28(1) provides that paragraphs 28(1)(b) and (c) do not apply in computing the income of a taxpayer for the taxation year in which the taxpayer dies. However, paragraph 28(1)(f) of the Act does apply for the taxation year in which the taxpayer dies.

Subsection 70(2) of the Act provides that where a taxpayer who has died had, at the time of death, rights or things which would have been included in income when realized or disposed of, the value of the rights or things at the time of death is to be included in the taxpayer's income for the taxation year in which the taxpayer died unless the taxpayer's legal representative elects within the required time frame to file a separate income tax return for the year. The legal representative must file this election not later than the day that is one year after the taxpayer's date of death or the day that is 90 days after the mailing of any notice of assessment of the taxpayer for the year of death. If the legal representative has made a valid election, the legal representative may file a separate return of the value of the deceased taxpayer's rights or things and pay tax thereon for the taxation year in which the taxpayer died as if the taxpayer were another person. If a separate return is filed, it must include the total value of all the deceased taxpayer's rights or things other than those transferred to beneficiaries within the time provided by subsection 70(3) of the Act.

Based on the information provided, the taxpayer would have included the value of inventory ($XXXXXXXXXX) in income pursuant to paragraph 28(1)(b) for the XXXXXXXXXX taxation year and claimed a corresponding deduction ($XXXXXXXXXX) pursuant to paragraph 28(1)(f) for the XXXXXXXXXX taxation year. In our view, no further amounts are required to be included in income or deducted on the deceased's XXXXXXXXXX final T1 return for the year of death in respect of the optional inventory adjustment. As indicated in paragraph 2 of IT-212R3, Income of Deceased Persons - Rights or Things, where a taxpayer at the time of death had rights or things which, when realized or disposed of, would have been included in computing income, subsection 70(2) requires the value of such rights or things at the date of death to be included in computing income for the year of death. Subsection 70(2) includes in income amounts that have been earned but have not been included in income such as "cash basis" inventory (see paragraph 2 of IT-212R3). Paragraph 20 of IT-212R3 indicates that if a separate subsection 70(2) return is filed, it must include the total value of all the deceased taxpayer's rights or things other than those transferred to beneficiaries within the time provided by subsection 70(3) of the Act. Accordingly, in our view, the taxpayer's legal representative can choose to elect to file a subsection 70(2) return within the time period permitted, as set out in that provision, and report the full amount of the value of the grain inventory of $XXXXXXXXXX on the subsection 70(2) return. By virtue of subsection 70(2), the taxpayer's legal representative cannot choose to report only part of the value of the grain inventory on the subsection 70(2) return. In addition, if an election is made by the taxpayer's legal representative to file a subsection 70(2) return, all of the taxpayer's rights or things have to be reported on that return. Where the subsection 70(2) election is not made, the entire $XXXXXXXXXX would have to be included in the deceased taxpayer's final return. Since no amount was included in income for the previous year pursuant to paragraph 28(1)(b), no offsetting deduction under paragraph 28(1)(f) would be allowable on either the final return or the 70(2) elective return.

We note that in your correspondence, you indicate that in XXXXXXXXXX, the client claimed an optional inventory adjustment under paragraph 28(1)(f) of $XXXXXXXXXX for grain inventory. It is unclear to us if, instead, you had meant to state that the client had reported income of $XXXXXXXXXX under paragraph 28(1)(b) for grain inventory on his XXXXXXXXXX return. If this is the case, then if the legal representative chooses not to file a separate 70(2) return, a deduction under paragraph 28(1)(f) would be claimed for $XXXXXXXXXX on the deceased's XXXXXXXXXX final return and the total value of the grain inventory of $XXXXXXXXXX would also be reported as income on the deceased's XXXXXXXXXX final return. If the taxpayer's legal representative chooses to file an elective 70(2) return, then the total value of the grain inventory of $XXXXXXXXXX must be reported on the 70(2) return. However, a deduction for $XXXXXXXXXX pursuant to paragraph 28(1)(f) could only be claimed on the deceased's XXXXXXXXXX final return. In this regard, paragraph 70(2)(b) requires that the "separate return of income for the year" be computed as if "that other person's only income for the year were the value of the rights or things". In our opinion, such wording prevents a deduction under paragraph 28(1)(f) from being made on the subsection 70(2) separate return. For example, the preamble to subsection 28(1) of the Act provides that a deduction under paragraph 28(1)(f) is "for the purpose of computing the income of a taxpayer for a taxation year from a farming or fishing business". The income or loss from the deceased taxpayer's farming business is reported on the final T1 return. It is only the value of rights or things that is included on the subsection 70(2) return.

For your information, a copy of this memorandum will be severed using the Access to Information Act criteria and placed in the Legislation Access Database (LAD) on the Department's mainframe computer. A severed copy will also be distributed to the commercial tax publishers for inclusion in their databases. The severing process will remove all material that is not subject to disclosure including information that could disclose the identity of the taxpayer. Should your client request a copy of this memorandum, they can be provided with the LAD version or they may request a copy severed using the Privacy Act criteria which does not remove client identity. Requests for this latter version should be made by you to Jackie Page at 613 994-2898. The severed copy will be sent to you for delivery to the client.

J. Wilson
for Director
Business and Publications Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch

??