10 April 2001 External T.I. 2001-0075655 - PENSION SURPLUS SURVIVING SPOUSE

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 a deceased member's surviving spouse taxable in full in the year of receipt?

Position: Yes.

Reasons: The amount is pension income and it does not qualify as a lump-sum payment for the purposes of section 110.2 of the Act.

XXXXXXXXXX 2001-007565

M. P. Sarazin, C.A.

April 10, 2001

Dear XXXXXXXXXX:

Re: Taxation of a Lump-Sum Pension Surplus Payment

This is in reply to your letter of February 19, 2001, which was forwarded to us by Mr. Jim Simpson of the Winnipeg Tax Services Office, requesting our views regarding the taxation of a lump-sum pension surplus payment received by the surviving spouse of a deceased member of a registered pension plan ("RPP").

As we understand the facts in your letter, surplus funds were removed from the RPP in XXXXXXXXXX. In XXXXXXXXXX, the current and former participants in the RPP filed a class action lawsuit claiming ownership of the surplus funds. The lawsuit was settled XXXXXXXXXX. An individual was a member of the RPP until his death on XXXXXXXXXX. As a result of the lawsuit settlement, the individual's surviving spouse received a lump-sum pension surplus payment of approximately $XXXXXXXXXX in XXXXXXXXXX.

You are enquiring as to whether the income received by the surviving spouse has to be reported as income by the surviving spouse or by the deceased taxpayer's estate and whether the amount would be a lump-sum payment for the purposes of section 110.2 of the Income Tax Act (the "Act").

Comments

The following discusses the taxation of a lump sum payment out of a registered pension plan and the application of section 110.2 of the Act with respect to retroactive lump sum payments.

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 Interpretation Bulletin IT-499R entitled "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 amount received out of or under a superannuation or pension fund or plan is included in income pursuant to subparagraph 56(1)(a)(i) of the Act.

Pursuant to 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. A "qualifying amount" is defined in subsection 110.2(1) of the Act to mean an amount (other than interest) that is included in computing the individual's income for the year and represents spousal or child support amounts, superannuation or pension benefits otherwise payable on a periodic basis, employments insurance benefits or benefits paid under wage loss replacement plans. An eligible amount also includes income received from an office or employment (or because of a termination of an office or employment) under the terms of a court order or judgment, an arbitration award or in settlement of a lawsuit.

In our opinion, a retroactive lump sum pension surplus payment does not qualify as a qualifying amount for purposes of subsection 110.2(1) of the Act. The lump sum payment of surplus from a pension plan is not referable to payments due in previous years. Generally, section 110.2 of the Act applies to amounts that were due and owing in prior years.

In Interpretation Bulletin IT-212R3 entitled "Income of Deceased Persons - Rights or Things", the Canada Customs and Revenue Agency provides general comments with respect to 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 described above, no member of the RPP had a right to the surplus until the date of the judgment in XXXXXXXXXX.

To conclude, in our view, the lump sum payment of pension surplus received by a surviving spouse is taxable income of the surviving spouse in the year of receipt pursuant to paragraph 56(1)(a)(i) of the Act.

Copies of interpretation bulletins are available from your local tax services office or on the Internet at the following site - http://www.ccra-adrc.gc.ca/formspubs/menu-e.html.

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

Yours truly,

Roberta Albert, C.A.

for Director
Financial Industries Division
Income Tax Rulings Directorate

c.c. Jim Simpson, Client Services Division
Winnipeg Tax Services Office