3 November 2006 Internal T.I. 2006-0192051I7 - Lump sum retroactive pension 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.

Principal Issues:

Is the lump sum payment qualified as "rights or things" under subsection 70(2) of the Act?

Position:

May be treated as rights or things.

Reasons:

The payment is still regarded as income to the estate or beneficiary under paragraph 56(1)(a) of the Act, but if the executor desires to report that amount as income of the pensioner in the year of death pursuant to subsection 70(2) of the Act, no objection will be made to that manner of reporting, nor to any consequential election properly made under subsection 70(2).

								November 3, 2006

	Ginette Charette					HEADQUARTERS
	Client Services Division			Income Tax Rulings
	Estrie-Mauricie Tax Services Office	  	Directorate
	Trois-Rivières Office				Danielle Bouffard
(613) 590-2155

								2006-019205

Tax treatment of a lump sum retroactive pension payment

This is in reply to your memorandum of June 20, 2006, wherein you requested our opinion as to the income tax treatment of a lump sum payment that was made by a registered pension plan to a deceased's estate.

In this memorandum, unless otherwise stated, all references to the "Act" mean the Income Tax Act, and unless otherwise stated, statutory references in this letter are to the Act.

Facts

Deceased means and refers to the Late XXXXXXXXXX, deceased XXXXXXXXXX
Estate means the Estate of XXXXXXXXXX
Pension Plan XXXXXXXXXX
Survivor spouse XXXXXXXXXX

Our understanding of the facts is as follows:

In a letter dated September 14, 2005, the Pension Plan informed the survivor spouse that an error was made when they calculated the annual inflation protection increases of her husband's pension. Normally, inflation protection increases are calculated using a "member's pension commencement date". However, under special circumstances, such as in the deceased's situation, the right date should have been the "disability benefit commencement date" and, therefore, the deceased's pension paid during his lifetime should have reflected inflation protection increases using that particular date. The deceased was pensioned many years before his death. The Pension Plan determined the difference in pension attributable to the correction date, including interest, payable to the estate (the "lump sum"). The Pension Plan issued a T4A for the 2006 taxation year showing a lump sum payment of $ XXXXXXXXXX and an amount of $ XXXXXXXXXX as income tax deducted.

The deceased's representative filed in 2005 a final return and also a separate return under subsection 70(2) of the Act (the "rights or things return") on which was declared a lump sum payment of $ XXXXXXXXXX as "other pensions or superannuation". The rights or things return was filed within the one-year limit after the date of death. Both returns were assessed in 2005. In February 2006, the representative filed a T1-ADJ T1 Adjustment Request regarding the rights or things return and joined the T4A slip issued by the Pension Plan.

Your views

The lump sum payment cannot be reported as income on rights or things return under subsection 70(2) of the Act. This amount has to be reported by the Estate in the year received as income from a superannuation or pension benefit under subparagraph 56(1)(a)(i) of the Act on the T3 Trust Income Tax and Information Return.

Position of the representative

The amount of $ XXXXXXXXXX was not a lump sum pension payment due the deceased as a result of his death. It was the correction of an error in the amount of his periodic pension payments payable to him while alive. The amount was properly reported as a right or thing per subsection 70(2) of the Act.

Question

Is the lump sum payment qualified as "rights or things" under subsection 70(2) of the Act?

Our comments

Special release dated July 26, 1995 revising paragraph 2 of Interpretation Bulletin IT-212R3 discusses the tax treatment of "rights or things" that a taxpayer owns on death. The revised paragraph discusses and clarifies what is meant by the term "rights or things" that is used at subsection 70(2) of the Act. The paragraph states that, "Subsection 70(2) includes in income amounts that have been earned but have not been included in income..."

For amounts to be considered "rights or things" pursuant to subsection 70(2) of the Act, the deceased must have had a clear right to the amounts at the time of death. If the deceased had no proprietary interest or clear right to the amounts at that time, then the said amounts would not qualify for treatment under subsection 70(2) of the Act.

If our understanding of the facts is correct, the lump sum payment was paid as a result of the administrators of the Pension Plan determining, after the death of the taxpayer, that they had miscalculated the amount of superannuation benefits that were payable to the deceased before his death. The Pension Plan administrators re-calculated the amounts, determined what the differences were and resolved to effect a lump sum corrective payment to the deceased who had been receiving insufficient amounts over the years. Within the first year of the estate, the deceased's representative elected to declare the lump sum payment in a separate "rights or things" return.

Our position on the taxation of lump-sum pension payments is explained in paragraph 15 of IT-212R3, "Income of Deceased Persons - Rights or Things". Our position is that a corrective lump-sum payment such as the one described herein is income of the recipient (the estate or beneficiary) under subparagraph 56(1)(a)(i) of the Act. In the past however, we have also taken the position (see file # E9921587) that if the executor desires to report that amount as income of the pensioner in the year of death pursuant to subsection 70(2) of the Act, no objection will be made to that manner of reporting, nor to any consequential election properly made under subsection 70(2).

An election properly made under subsection 70(2) of the Act must be made by the later of one year after the date of death, or 90 days after any notice of assessment for the year of death. Since the representative made that election, in our view, the rights or things return should be assessed as filed as per the representative's request.

We trust the above comments are of assistance.

Alain Godin
Section Manager
For Division Director
International & Trusts Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch