9 April 2010 External T.I. 2009-0324381E5 - Payments to a deceased taxpayer

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: Whether statutory deductions should be withheld on payments made to deceased taxpayers

Position: Where the pay equity agreement is signed after the date of death of the taxpayer, the pay equity amount is not taxable nor is it subject to CPP and EI. Where the pay equity agreement is signed before or on the date of death, but paid after the date of death the pay equity amount is subject to income tax and CPP but not EI.

Reasons: Income was not determinable before the date of death

XXXXXXXXXX 							2009-032438
								J. White
April 9, 2010

Dear XXXXXXXXXX ,

I am responding to the letter received from XXXXXXXXXX dated May 26, 2009 in which she asked for confirmation on the requirement to withhold statutory deductions on lump sum pay equity amounts paid to the estates of deceased employees.

Confirmation of the tax implications of transactions is given only in reply to an advance income tax ruling request submitted in the manner set out in Information Circular 70-6R5. While we are unable to comment on the particular situation described in your letter, the following general comments may be of assistance to you.

Our Comments

The lump sum pay equity amount paid to the estates of deceased employees may or may not be taxable depending on whether the pay equity agreement was signed before or on the date of death or after the date the employee died.

Where the pay equity agreement is signed after the date of death of an employee, the employee has no determinable right to the pay equity amount at the date of death. In such a case, the pay equity amount paid to the estate of the employee is not subject to income tax, employment insurance (EI) deductions or Canada Pension Plan (CPP) deductions. This position is provided in Chart 3 of the guide Preparing Returns for Deceased Persons in respect of income tax and on pages 11 and 16 of Employers' Guide - Payroll Deductions and Remittances for CPP and EI respectively. These publications are available on our website at www.cra-arc.gc.ca.

Where the pay equity agreement is signed before or on the date of death, the employee has a determinable right to the pay equity amount at the date of death. The pay equity amount is included in the deceased person's income and is subject to income tax and CPP deductions, but not EI deductions. This position is provided in Chart 1 of the guide Preparing Returns for Deceased Persons in respect of income tax and on pages 11 and 16 of Employers' Guide - Payroll Deductions and Remittances for CPP and EI respectively.

Where the pay equity agreement is signed after the date of death, any unpaid interest in respect of the pay equity amount is taxable in the hands of the employee's estate. The interest payments are not subject to EI and CPP.

Where the pay equity agreement is signed on or before the date of death, any interest payable before the date of death is reported by the deceased employee and subject to income tax as the employee had a determinable right to the interest at the date of death. Any interest that becomes payable after the date of death is taxable in the hands of the estate. Interest payments are not subject to EI and CPP.

I trust the above answers your questions.

Yours truly,

Roger Filion CA
For Acting Director
Ontario Corporate Tax Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch