What happens to a vendor take-back if the seller dies?

A vendor take-back note is a promise to pay the seller over time. The CRA describes an estate, generally, as what the person who died owned and what they owed, and says the legal representative, typically the executor named in the will, is responsible for administering it. A note payable to the seller was something the seller owned. Ask an estate lawyer who is entitled to be paid and who can give a valid receipt, because that turns on the note, the will and provincial estate law.

The legal representative has duties to the CRA

The CRA says the legal representative must make sure the deceased person’s returns are filed and balances owing are resolved. Under section 159 of the Income Tax Act, a legal representative (other than a trustee in bankruptcy) must obtain a certificate from the Minister, which the CRA calls a clearance certificate, before distributing property in their possession or control, and is personally liable for the unpaid amounts to the extent of the value of the property distributed if they do not. Ask the estate’s lawyer how that step affects when note payments are released.

The reserve does not carry into the year of death

Section 72(1)(c) of the Income Tax Act provides that, where a taxpayer has died in a taxation year, no amount may be claimed under subparagraph 40(1)(a)(iii) (the capital gains reserve, and two related provisions) for that year. The CRA adds that a reserve claimed in the year before death must be included in income on the final return, and that in most cases a reserve cannot be deducted in the year of death.

The spouse or spousal trust election

Section 72(2) makes an exception where the right to receive the amount is transferred or distributed, on or after the death and as a consequence of it, to a spouse, common-law partner or spousal trust described in section 70(6), if the person who died was resident in Canada immediately before death and the legal representative and the transferee jointly elect in prescribed form. The CRA says the election is made on Form T2069, attached to the final return, so the reserve can be claimed on that return. Under section 72(2)(b), the amount is then deemed to have been claimed in the year of death and deemed to be proceeds of a disposition of capital property by the transferee in their first taxation year ending after the death, and the CRA says the transferee must bring the reserve back into income in the return for the first year after death.

Questions a seller can ask in advance

• Who will receive payments on the note, and does the will say what happens to it?
• Do the note and security documents name successors or assigns?
• Would the right to be paid pass to a spouse or spousal trust, and does the election apply?
• How will the final return treat the unpaid balance?