15 March 2006 External T.I. 2005-0140101E5 - Survivor benefits received from U.S. employer

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.

Principal Issues: Whether survivor benefits received from U.S. employer are death benefits.

Position: Question of fact. However, since it appears that the benefits are payable from the Basic Plan of the Federal Employment Retirement System (FERS), they are likely pension benefits.

Reasons: It is our position that benefits from a pension plan are excluded from the definition of death benefits.

XXXXXXXXXX 					2005-014010
J. Gibbons, CGA
March 15, 2006

Dear XXXXXXXXXX:

Re: U.S. Survivor Annuity

We are writing in response to your letter concerning the taxation of amounts being received by your mother-in-law in respect of her late husband's employment with the United States (U.S.) Postal Service (the "Particular Benefits"). These amounts were reported on the Internal Revenue Service Form CSF1099R, Statement of Survivor Annuity. In particular, you wish to know whether the $10,000 exemption for "death benefits" would apply to such amounts. In your letter, you indicated that a portion of your late father-in-law's pension was deducted at source and put into a separate fund for benefits to be made payable to his wife in the event of his death.

Written confirmation of the tax implications inherent in particular transactions is given by this Directorate only where the transactions are proposed and the subject matter of a request for an advance income tax ruling submitted in the manner set out in Information Circular 70-6R5. However, we have provided some general comments below, which we hope will be of some assistance to you.

In general terms, a death benefit is defined in the Income Tax Act (the "Act") as the total of all amounts (less an exemption of up to $10,000) received by a taxpayer in a taxation year on or after the death of an employee or former employee in recognition of such employee's service in an office or employment. Paragraph 4 of Interpretation Bulletin IT-508R, Death Benefits, describes some payments that will not be considered death benefits. One of the exclusions listed is a payment from a superannuation or pension plan. This publication, as well as the other publications referred to below, can be found on the Canada Revenue Agency's website at www.cra-arc.gc.ca.

For purposes of the Act, the term "superannuation or pension benefit" is defined under subsection 248(1) of the Act to include any amount received out of or under a superannuation or pension fund or plan and any payment made to a beneficiary under such a plan or fund in accordance with the terms of, or resulting from the amendment or termination of, the plan or fund. The determination of whether a particular plan would constitute a superannuation or pension fund for purposes of the Act is a question of fact.

Based on the limited information provided in your letter and in our telephone conversations (Gibbons/XXXXXXXXXX; Baldwin/XXXXXXXXXX), we believe that the Particular Benefits may be payable from the "Basic Benefit Plan" of the "Federal Employment Retirement System" or "FERS". Based on the public information that we were able to obtain on the Internet concerning this plan, it appears to us that the Basic Benefit Plan is a pension plan to which an employee is required to make regular contributions, based on a specified percentage of his or her salary. It is also our understanding that under this plan a retired member's annuity is automatically reduced to provide spousal survivor benefits unless those benefits are jointly waived in writing by the retiree and the spouse before retirement.

If, in fact, the Particular Benefits are in respect of survivor benefits from the Basic Benefit Plan, it is our view that they would constitute pension benefits rather than death benefits for Canadian income tax purposes. In this regard, benefits received by a resident of Canada out of an unregistered foreign superannuation or pension are included in income under subparagraph 56(1)(a)(i) of the Act, in the same way as a pension received from a source in Canada would be, subject to the provisions of any applicable tax treaty.

Under Article XVIII of the Canada-U.S. Tax Convention (the "Convention"), U.S. source pension income received by a Canadian resident may be taxed in Canada to the extent that the pension would be taxable if the recipient lived in the U.S. Under the Convention, such pension income may also be taxed in the U.S., but the amount of such tax cannot exceed 15% of the gross amount of a periodic pension. However, if a Canadian resident is subject to tax in Canada and the U.S. on the same income, he or she may be entitled to a foreign tax credit for Canadian income tax purposes. In this regard, reference may be made to Interpretation Bulletin IT-270R2, Foreign tax credit.

We trust that these comments will be of assistance to you.

Yours truly,

Mary Pat Baldwin, CA
for Director
Financial Sector and Exempt Entities Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch