12 June 2012 Roundtable, 2012-0447551C6 - STEP CRA Roundtable Question 14 - June 2012

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).

STEP CRA Roundtable – June 2012

Question 14:

A taxpayer (“Pensioner”) with no spouse, common-law partner or children had retired before her death and had commenced drawing a monthly retirement pension, with a guarantee period, from the defined benefit registered pension plan (“RPP”) of which she was a member. Rather than making a beneficiary designation pursuant to the terms of her will, prior to her death she had designated, in accordance with the terms of the RPP, her brother as the designated beneficiary (“Sibling”) who would receive the lump-sum benefit provided by the RPP should she die before the guarantee period had ended.

After the death of the Pensioner, the RPP paid the lump-sum benefit to Sibling (net of required withholding tax), in accordance with the terms of the plan, and issued a T4A slip in respect of the payment. Pursuant to the terms of Pensioner’s will, the residual assets of the estate were distributed to a friend of the Pensioner (“Friend”), after all estate expenses were determined and settled.

The executor of the estate of Pensioner, who knew her well while she was alive, is of the view that Pensioner wanted Sibling to receive the full value of the RPP lump-sum (before tax withholdings) and for the pension income to be reported as income on the final return of Pensioner, so that the tax in respect of the amount would be borne by the estate of the Pensioner, rather than by Sibling. The executor has asked, whether, pursuant to subsection 70(2) of the Income Tax Act (the “Act”), there is the possibility that he might report the lump-sum income as income of the Pensioner, rather than of Sibling.

Can CRA comment on whether the executor can choose to have the RPP lump-sum reported on the final return of the Pensioner? In this regard, can CRA comment on the following wording found in paragraph 15 of Interpretation Bulletin IT-212R3 Income of Deceased Persons – Rights or Things (“IT-212R3”):

“There may be exceptional cases where 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. Where this is so, 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).”

CRA Response

It is our understanding that RPPs often provide that a guarantee period may attach to certain forms of pension provided to a pensioner. In the event of death of the pensioner prior to the expiry of the guarantee period, the plan may provide that the remaining pension payments will continue to a designated beneficiary, or, as is often the case, for a lump-sum commutation of those payments to the estate or to a designated beneficiary.

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".

It is our view that paragraph 15 of IT-212R3 would not apply to the facts described in this question. The exception noted in paragraph 15 of IT-212R3, which affords rights or things treatment if the executor desires, contemplates an uncommon 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 not analogous to the facts here, as 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, must be included in the income of the recipient, Sibling, in accordance with subparagraph 56(1)(a)(i) of the Act.

Phil Kohnen
2012-044755
June 12, 2012