27 March 2000 External T.I. 2000-0000165 - TAXATION LUMP SUM SUPLUS PAYMENT

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: Is a lump sum payment of surplus from a pension plan paid to the beneficiary of an estate taxable in full in the year of receipt.

Position: Yes, the payment is taxable pursuant to paragraph 56(1)(a)(i) of the Act.

Reasons: (a) The amount is considered to be a superannuation or pension benefit. In this case (b) the provisions of ITAR would not apply, (c) the payment would not be considered a right or thing and (d) the new proposed legislation of section 110.2 does not apply to lump sum pension surplus payments.

XXXXXXXXXX 						2000-000016

March 27, 2000

Dear XXXXXXXXXX:

Re: The taxation of a lump sum surplus payment

This is in reply to your letter of December 30, 1999 requesting information on the lump-sum pension surplus payment received by your mother.

The fact situation in your letter relates to an actual fact situation, and your local tax services office will consider requests for written opinions on completed transactions and provide over-the-counter advice and assistance on general matters. Consequently, we can only offer the following general comments which are not binding on Canada Customs and Revenue Agency (the "Agency").

As we understand the facts in your letter, your father accrued pension benefits under his employer's pension plan until he retired in 1971. Your father died in 1992, and pursuant to his will, his spouse (your mother) was the only beneficiary. In 1997 the Ontario Court of Justice (General Division) ruled that the retirees of your father's former employer would receive a portion of the pension plan's surplus. The payments were made to the retirees in 1998. The payment of your father's share of the surplus was made to your mother in 1998.

As we understand it, a T4A was issued to the estate of your father and your mother included the amount in her 1998 income tax return. You indicate that you have looked at several publications and provisions of the Income Tax Act (the "Act") and we wish to point out that IT-281R2 (Elections on Single Payments from a Deferred Profit Sharing Plan) and section 147 of the Act are not relevant to your situation since the documents you submitted indicate that your father was a member of a registered pension plan, and not a deferred profit sharing plan.

You are enquiring as to whether the income received by your mother is fully taxable. The following discusses the taxation of a lump sum payment out of a registered pension plan, the proposed amendment to the Act concerning retroactive lump sums and also makes reference to the two other publications you cite, namely I.C. 74-21R (Payments out of Pension and Deferred Profit Sharing Plans - ITAR 40) and IT-212R3 (Income of Deceased Persons - Rights or Things).

Pursuant to subsection 248(1) of the Act, a superannuation or pension benefit includes any amount received out of or under a superannuation or pension fund or plan. As noted in paragraph 4 of the enclosed copy of IT-499R (Superannuation or Pension Benefits), any amount received (subject to certain exceptions which appear not to apply in your case) out of a superannuation or pension fund is income whether it is in the nature of a single payment or otherwise. This income is included in income pursuant to subparagraph 56(1)(a)(i) of the Act.

With respect to your question on section 40 of the Income Tax Application Rules ("ITAR"), the maximum amount for election under 40(5)(b) is limited to the lesser of the amount received and an amount based on the number of consecutive 12 month periods throughout which the "taxpayer" was a member of the plan described in 40(1)(a)(i). In your mother's situation she was never a member of the plan so is the election would not be available her.

With respect to IT-212R3 and the treatment of "rights or things" that a taxpayer owns on death, we note that subsection 70(2) of the Act only applies where the pension plan member had a right at the time of death to receive an amount out of the pension plan. In the situation you describe, no member of the pension plan had a right to the surplus until the date of the judgment in 1997.

Pursuant to the February 1999 Budget proposed legislation was released concerning retroactive lump-sum payments. Pursuant to proposed section 110.2 of the Act, a qualifying retroactive lump-sum payment includes amounts received in 1995 or a subsequent year that relate to one or more years preceding the year of payment. At this time, the following eligible sources of income have been identified:

• Periodic superannuation or pension benefits;
• Employment insurance benefits;
• Spousal or child support payments; and
• Employment income payments received under a court judgment, an agreement to terminate a lawsuit, or under an arbitration award (other than as a result of arbitration under normal collective bargaining).

However, other benefits may be prescribed.

In our opinion the proposed legislation on retroactive lump sum payments does not apply to the receipt of lump sum payments of surplus from a pension plan since surplus is not referable to payments due in previous years. Generally the legislation applies to amounts that were due and owing in prior years.

To conclude, it is our opinion that the lump sum payment of pension surplus received by your mother is taxable to her in the year of receipt pursuant to paragraph 56(1)(a)(i) of the Act.

We trust that the above comments will be of assistance to you.

Yours truly,

Patricia Spice
for Director
Financial Industries Division
Income Tax Rulings Directorate