18 January 2010 External T.I. 2009-0348631E5 - Indian Employment Income - Death Benefits

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: 1. Are death benefits paid to the estate of an Indian exempt from tax? 2. Are death benefits paid to an Indian beneficiary from the estate exempt from tax?

Position: 1. No, but may be eligible for a deduction. 2. Maybe.

Reasons: 1. Included in the estate's income under 56(1)(a)(iii) and deducted under 104(6)(b). 2. If the death benefits arise in respect of an Indian's tax-exempt employment income and are paid to a beneficiary who is also an Indian, then the income will be exempt.

								Lori Merrigan
XXXXXXXXXX 							(613) 957-8979
								2009-034863
January 18, 2010

Dear XXXXXXXXXX :

Re: Taxation of Death Benefits of an Indian (XXXXXXXXXX )

This is in response to your letter of November 12, 2009, inquiring whether death benefits paid to the estate of an Indian, as that term is defined in section 2 of the Indian Act, and then paid to an Indian beneficiary, are exempt from tax.

The situation outlined in your letter appears to involve a specific taxpayer. It is not this Directorate's practice to comment on transactions involving specific taxpayers other than in the form of an advance income tax ruling or in the course of assisting other areas of the Canada Revenue Agency (the "CRA"). Please refer to Information Circular 70-6R5, "Advance Income Tax Rulings", dated May 17, 2002. This Information Circular and other CRA publications can be accessed on the internet at http://www.cra-arc.gc.ca. As your situation involves a specific taxpayer and a completed transaction, you should submit all relevant facts and documentation to the appropriate Tax Services Office ("TSO") for their views. A list of TSOs is available on the "Contact Us" page of the CRA website. Although we cannot comment on your specific situation, we are prepared to provide the following general comments, which may be of assistance.

Paragraph 81(1)(a) of the Income Tax Act (the "Act"), together with paragraph 87(1)(b) of the Indian Act, exempt from tax certain income of Indians. Paragraph 87(1)(b) of the Indian Act states that "the personal property of an Indian or a band situated on a reserve" is exempt from taxation. The courts have determined that income from employment is personal property for purposes of section 87 of the Indian Act. The Supreme Court of Canada, in Williams v. The Queen, 92 D.T.C. 6320, concluded that the determination of whether income is situated on a reserve, and thus exempt from tax, requires identifying the various factors connecting the income to a reserve and weighing the significance of each such factor. To simplify the application of this "connecting factors test" with respect to common employment situations, the CRA, together with interested Indian organizations, developed the Indian Act Exemption for Employment Income Guidelines (the "Guidelines").

An estate arising as a consequence of the death of an individual is taxed as a testamentary trust for income tax purposes. Where death benefits are paid to the deceased Indian's estate, the death benefits will be included in the income of the estate under subparagraph 56(1)(a)(iii) of the Act. The estate would have to pay tax in respect of the death benefits. However, the estate would be entitled to deduct the amount that became payable to a beneficiary in the year under paragraph 104(6)(b) of the Act. This deduction is limited to the amount that would be its income for the year. We note that subsection 104(24) of the Act deems an amount to be payable for these purposes where it was paid or the beneficiary was entitled to enforce payment in the year. Consequently, if the death benefits are paid or payable to a beneficiary in a year, the estate may deduct the amount of the death benefits from its income for that year. Paragraph 104(13)(a) of the Act requires the beneficiary to include in his or her income for the year the amount by which the estate reduces its income under paragraph 104(6)(b) of the Act.

Where an Indian has earned exempt employment income, the comments to the Guidelines note that employment-related income such as benefits from a registered pension plan will also be exempt from tax. Death benefits are similarly exempt, if these benefits are connected to exempt employment income and are paid to a beneficiary who is also an Indian. Similarly, where death benefits connected to exempt employment income are paid to an Indian's estate and subsequently paid out to an Indian beneficiary of the estate, the amount required to be included in the beneficiary's income under paragraph 104(13)(a) of the Act will be treated by the CRA as exempt income. However, if the beneficiary is not an Indian, the death benefit is not considered to be personal property of an Indian situated on a reserve (as required by section 87 of the Indian Act), and the amount received by the beneficiary would generally be taxable.

We trust that these comments will be of assistance.

Yours truly,

Eliza Erskine
Manager
Non-Profit Organizations and Aboriginal Issues
Financial Sector and Exempt Entities Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch