13 April 2012 External T.I. 2012-0441381E5 - Tax treatment of pension lump-sum 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: Can the executor choose to have the lump-sum amount that was paid to the designated beneficiary in respect of the deceased member of an RPP reported as income on the final return of the deceased?

Position: No. It is not a right or thing.

Reasons: It is clearly brought into income of the recipient pursuant to 56(1)(a)(i).

XXXXXXXXXX
					2012-044138
					Phillip Kohnen, CMA
					(613) 946-4189
April 13, 2012

Dear XXXXXXXXXX :

Re: Tax liability on a designated pension

This is in reply to your letter received on March 27, 2012 in which you requested a technical interpretation with respect to a pension which had been designated to a non-spousal beneficiary outside of the will of the deceased pensioner.

Our understanding of the facts relevant to the scenario you have posed is as follows:

1. The deceased (the "Pensioner") retired before her death and had commenced drawing a monthly retirement pension from the defined benefit registered pension plan ("RPP") of which she was a member.
2. Prior to her death, the Pensioner designated, in accordance with the terms of the RPP, a person who was neither her spouse nor common-law partner as the designated beneficiary (the "Beneficiary") who would receive the lump-sum benefit provided by the RPP should she die.
3. The beneficiary designation was made under the RPP; it was not made pursuant to the terms of the Pensioner's will.
4. Following the death of the Pensioner, the RPP paid the lump-sum benefit to the Beneficiary, in accordance with the terms of the plan, and issued a T4A slip to the Beneficiary in respect of the payment.
5. As the executor of the estate of the Pensioner, you would like to report the lump-sum benefit reported on the T4A slip as income on the final return of the Pensioner, pursuant to subsection 70(2) of the Income Tax Act (the "Act"), so that the tax in respect of the amount will be borne by the estate of the Pensioner, rather than by the Beneficiary.

In support of your request that the amount be reported as income in the final return of the Pensioner, you have noted the following wording found in paragraph 15 of Interpretation Bulletin IT-212R3 Income of Deceased Persons - Rights or Things ("IT-212R3"):

"[If] a pension fund or plan provides for voluntary withdrawal of contributions by an individual contributor (possibly with interest and/or employer's contributions) at a time or times other than on retirement or on leaving the employment ... the portion of the lump-sum payment which would have been taxable had it been received by the decedent normally is still regarded as income of the estate or beneficiary; but if the executor desires for any reason, to report that amount as income of the employee for the year of death pursuant to subsection 70(2), no objection will be made to that manner of reporting nor to any consequential election properly made under subsection 70(2)."

Our comments

Subsection 70(2) of the Act provides for the tax treatment of "rights or things" that a taxpayer had at the time of death, the amount of which when realized or disposed of would have been included in the taxpayer's income. The Act provides that the value of "rights or things" at the time of death are to be reported in the taxpayer's final return, or alternatively, an election may be made to file a separate return in respect of these amounts. IT- 212R3 discusses the general views of the Canada Revenue Agency regarding the tax treatment of "rights or things".

In regard to the issue you have raised in your submission, the wording noted above from paragraph 15 of IT-212R3 would not apply, as the scenario contemplated in the bulletin commentary is not analogous to your scenario.

The exception noted in paragraph 15 of IT-212R3, which affords rights or things treatment if the executor desires, contemplates a situation whereby a pension plan or fund permits a member to voluntarily withdraw contributions from the plan prior to death, and other than at retirement or withdrawal from employment. This is clearly not the case in your scenario, as the Pensioner had retired and commenced to receive a pension.

Accordingly, it is our view that the lump-sum payment paid from the RPP would not constitute a right or thing under the Act, the exceptional scenario discussed in paragraph 15 of IT-212R3 would not apply to it, and thus the amount, as reported on the T4A, is appropriately included in the income of the recipient, Beneficiary, in accordance with subparagraph 56(1)(a)(i) of the Act.

Yours truly,

Phillip Kohnen
For Director
Business and Trusts Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch