18 June 1997 Internal T.I. 9703926 - RPP CPP LUMP SUM PYMT RIGHT OR THING

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.

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the Department.

Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle du ministère.

Principal Issues:

The income tax treatment of certain corrective payments that were made by a registered pension plan to a deceased beneficiary's estate.

Position:

IT-212R3 par 15 takes the position that certain superannuation or pension benefits may be treated as rights or things.

Reasons:

Same treatment accorded the corrective payments.

							June 18, 1997

	HEADQUARTERS				HEADQUARTERS
G. W. Venner	Franklyn 			S. Gillman
	Director General				952-8953
	Individual Returns and
	  Payments Processing Directorate

	Attention:  Ed Williams			7-970392

Lump Sum Payment to a Deceased

This is in reply to your memorandum of February 12, 1997 wherein you requested our opinion as to the income tax treatment of certain corrective payments that were made by a registered pension plan to a deceased beneficiary's estate under various scenarios which are outlined below.

Facts

Our understanding of the facts is as follows:

XXXXXXXXXX

You requested that we consider the above set of facts involving XXXXXXXXXX and provide you with our opinion as to the tax implication the Payments manifest under three scenarios which are described below. You also requested that we consider when giving our response the situations where the executor of the estate received or has not received a clearance certificate from the Department pursuant to subsection 159(2).

XXXXXXXXXX

The three scenarios which you outlined are as follows:

The Payment is made to the estate and there is a surviving spouse who is the sole beneficiary of the estate.

The Payment is made to the estate, there is a surviving spouse and there is more than one beneficiary.

The Payment is made to the estate, there is no surviving spouse and the estate is wound up.

You also requested a response to the following questions:

Would these Payments qualify as rights or things in accordance with subsection 70(2)?

If so, can an income tax return be filed under subsection 70(2) several years after the death of the individual?

Are there any other implications of these lump sum payouts after death?

RULINGS COMMENTS

It should be noted that we have examined our data banks and have not found a similar situation that has been dealt with in the past. XXXXXXXXXX

Clearance Certificate

Subsection 159(2) requires inter alia, any person who is administering an estate of another person, i.e. an administrator, executor, etc., to obtain a clearance certificate prior to distributing any property of the estate that is being administered. The circumstances under which a clearance certificate is required is outlined in Information Circular IC 82-6R issued by Revenue Canada on February 28, 1997. As stated in the Information Circular at paragraph 4:

"A clearance certificate certifies that all amounts for which the taxpayer is liable under the Act, have been paid, or that the Minister of National Revenue has accepted security for payment. The certificate is for the taxation year in which you distributed property and any preceding year. The certificate applies to amounts for which you are, or may become, liable for payment as the responsible representative. ..."

Paragraph 5 of the Information Circular goes on to say:

"If you do not get a clearance certificate before you distribute property, you are liable for unpaid amounts, whether assessed before or after the actual distribution of property. This liability will not be more than the value of the property you distributed."

Therefore, should the executor not receive a clearance certificate prior to distributing the assets of the estate, the executor, subsequent to the distribution, would become personally liable for any amounts owed by the estate to the government pursuant to the Act, as well as, payments of any outstanding CPP contributions and Employment Insurance premiums. Interest and penalties are also covered by a clearance certificate.

In the situations described in the above facts, when the Payment is received by the executor of the estate, the fact that the executor has or has not received a clearance certificate does not affect nor determine how the funds obtained from the Payment should be managed by the administrator of the estate. A clearance certificate does not wind-up nor end an estate's existence in the eyes of the law nor for purposes of the Act. Although the executor of an estate has distributed all the deceased property that it has taken possession of or has even wound up the estate, these acts do not preclude the executor from taking possession of any other property of the deceased that becomes known to him/her at a later date. The executor would still have the legal capability of taking possession of the new property and dealing with it as determined by the law.

Given the above analysis, our responses to your queries will not take into consideration the fact of whether a clearance certificate has been obtained or not. However, when the administrator is prepared to distribute the property the estate received from the Payment and a clearance certificate for final distribution (form TX21) had already been obtained, another clearance certificate may be requested and obtained that relates to this new property. This procedure would be in accordance with the Department's published procedure found in paragraph 13 of Information Circular IC 82-6R.

Rights or Things

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). 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), the deceased must have had a clear right to the amounts at the time of death. If the employees 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).

XXXXXXXXXX

In determining whether these payments may be characterized as a "right or thing", an analogy may be drawn with this situation and the position taken at paragraph 3 of IT-210R2, Income of Deceased Persons - Periodic Payments and Investment Tax Credits, regarding retroactive salary or wage adjustments. That paragraph reads as follows:

"Only the amount of salary or wages accrued from the beginning of the pay period in which an employee dies to the date of death is included in the employee's income under paragraph 70(1)(a). When the amount due and unpaid is in respect of a prior pay period, such amount would be included in income under subsection 70(2). If, prior to the death of an employee, the employer is committed (say because of union bargaining) to pay retroactive salary or wage adjustments, but these are unpaid at the date of the employee's death, the amount due to the employee is included in income under subsection 70(2)."

This example of a salary or wage adjustment is similar to XXXXXXXXXX in that it is an adjustment of an amount that had been paid in the past. This supports the argument that the Payment can be considered a "right or thing."

This position is further supported in an example discussed at paragraph 15 of IT-212R3, "Income of Deceased Persons - Rights or Things" where a payment from a pension fund or plan results from a voluntary withdrawal of contributions. The IT states that where this occurs, "... 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 the 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 any consequential election properly made under 70(2)." It is our position that the same treatment should be taken with respect to the Payment.

In response to your question regarding the time frame in which a separate rights or things return may be filed, the Department's position with regards to this is set out in the above mentioned special release revising paragraph 20 of Interpretation Bulletin IT-212R3, where it states:

"Pursuant to subsection 70(2) the taxpayer's legal representative may elect to file a separate return of the value of the deceased taxpayer's rights or things and pay tax thereon for the taxation year in which the taxpayer died as if the taxpayer was another person. To be valid the election must be made not later than the later of one year after the date of death and 90 days after the mailing of any notice of assessment or reassessment for the year of death..."

Payments to the Estate

In response to the first three questions, the tax treatment given to an amount paid to an estate several years following the distribution of its property would be the same as when the estate first received the property of the deceased following the death. The fact that several years have past since the estate last filed an income tax return does not mean that the estate can not receive property of the deceased, nor deal with it under the provisions of the Act.

A superannuation or pension benefit is defined in subsection 248(1) to include any payment received out of a pension plan and paragraph 56(1)(a) requires the recipient of a superannuation or pension benefit to include it in income in the year of receipt. Therefore, given a scenario where the deceased final return is statute barred (i.e. the return can not be reassessed), the Payment received by an estate should be included in the income of the estate as pension income.

XXXXXXXXXX

CPP Disability Benefits For Previous Years

As a final note, subsection 56(8) allows an individual to exclude from income in the year of receipt CPP/Quebec disability benefits that relate to prior years (except where the prior year benefits are less than $300) and to pay tax on those benefits as if they had been received in the prior years to which they relate. The payment of tax on this basis is provided for in section 120.3. We note that the wording in subsection 56(8) refers to amounts received. If an amount is a right or thing with respect to the deceased, it is by definition not received by the deceased. If subsection 56(8) is amended by deleting the reference to disability such that it will apply to any CPP/Quebec Pension Plan benefits relating to prior years, the subsection will not be applicable to a right or thing being included in a return of a deceased since these amounts are not received by the deceased. However, elections under subsections 70(2) and (3) will be available with respect to these amounts.

We hope that this responds to your queries regarding the above two described situations. Should you have any further queries please contact us at your convenience.

Roy C. Shultis
Acting Director General
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch