27 October 2016 Internal T.I. 2015-0574851I7 - Settlement Payments Determinable After Death

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) Where a taxpayer dies prior to obtaining a determinable right to certain settlement payments, are the amounts taxable in the hands of the deceased taxpayer? 2) On what date did the taxpayer obtain a determinable right? 3) Where settlement payments relating to amounts that would have otherwise been taxable under paragraphs 6(1)(a) or 6(1)(f) if received by the deceased taxpayer while alive are made to an estate, surviving spouse or dependents of the deceased taxpayer, are the amounts taxable in the hands of these recipients? 4) Where pre- and post-judgement interest is paid to the estate, surviving spouse or dependents of the deceased taxpayer, are the amounts taxable in the hands of these recipients?

Position: 1) No; 2) In this case, the date that the court order was issued outlining the terms of the settlement; 3) No; 4) Yes

Reasons: 1) Neither subsection 70(1) nor 70(2) apply to the deceased taxpayer. 2) This is the date upon which the court order outlining the financial implications of the settlement was approved. 3) These amounts are not a source of income to the estate, surviving spouse or dependents. 4) Interest is subject to tax by virtue of paragraph 12(1)(c).

							October 27, 2016

Wladyslaw Kinastowski, Manager		M. Panourgias
Individual Returns Directorate		Income Tax Rulings Directorate
Assessment, Benefit, and Service Branch	(416) 973-9524
750 Heron Rd, 6th Floor, Room 636A
Ottawa ON						2015-057485

Settlement Payments Determinable After Death

We are writing in response to your request regarding the income tax implications of certain settlement payments made pursuant to a court order issued on April 15, 2013 (“2013 Court Order”) in respect of the class action lawsuit, Dennis Manuge vs. The Queen (court file number T-463-07). In particular, you have asked whether the settlement amounts paid in respect of class members who died prior to the date that the 2013 Court Order was issued are taxable in the hands of the deceased class members or taxable to the persons to whom the amounts were subsequently paid.

The class action lawsuit was brought forth on behalf of former members of the Canadian Forces. At issue was the reduction of monthly long-term disability benefits received by disabled Canadian Forces members (“Class Members”) under the Canadian Forces Service Income Security Insurance Plan (“SISIP”) by the monthly disability benefits received under the Pension Act (the “Offset”).

The 2013 Court Order outlines the terms of the settlement of the class action lawsuit, with the exception of one outstanding item that was dealt with in a subsequent court order issued in 2014. The 2013 Court Order requires the payment of the following amounts to Class Members (referred to as the “Settlement Amounts”): (i) a lump-sum payment representing each of the Offset amounts for all years which potentially dated back to 1976; (ii) a lump-sum payment referred to as the “Credit for Interest on Potential Tax Payable” calculated as 3.27% of the total Offset amount; and (iii) pre- and post-judgment interest.

Further, the 2013 Court Order provides that in respect of Class Members who are deceased, the Settlement Amounts payable to the date of death will be paid to the Class Member’s surviving spouse. Where the deceased Class Member does not have a surviving spouse, the payments will be paid to the Class Member’s dependent children. Where the deceased Class Member does not have a surviving spouse or dependent children, no amount will be paid in respect of that Class Member. (footnote 1) We understand that in some situations, payments were made to the estate of a deceased Class Member as opposed to being made directly to a surviving spouse or dependent.

Unless otherwise stated, all references herein to a part, section, subsection, paragraph or subparagraph is a reference to the relevant provision of the Income Tax Act, R.S.C. 1985 (5th Suppl.) c.1, (the “Act”) as amended.

Our Comments

Taxation of Deceased Class Members

It is our view that a determinable right to the Settlement Amounts was obtained by Class Members on the date of issuance of the 2013 Court Order, April 15, 2013. It is also our view that the Settlement Amounts will not be taxable in the hands of any Class Member who died prior to the time at which the Settlement Amounts became determinable. We have considered the application of subsections 70(1) and (2) since these are the only provisions that could possibly result in the Settlement Amounts being included in a deceased person’s income. In general terms, subsection 70(1) deems amounts which were payable periodically but not paid before an employee’s death to have accrued in equal daily amounts, and the amount so deemed to accrue to the time of death is included in the deceased person’s income. Subsection 70(1) does not apply to the Settlement Amounts since, at the time of death, these amounts were not payable. As for subsection 70(2), in general terms it concerns rights or things, other than amounts described in subsection 70(1), that are of an income nature and that have not been realized at the date of death. Subsection 70(2) does not apply to the Settlement Amounts since a Class Member who died prior to obtaining a determinable right to the Settlement Amounts would not have had a right or thing at the time of death as contemplated by subsection 70(2). With respect to the beneficiaries of estates, subsection 70(3) will not be applicable to tax the beneficiaries on rights or things since subsection 70(3) only applies if subsection 70(2) is otherwise applicable.

Taxation of Surviving Spouse, Dependents or Estate

A. Lump-Sum Payment of Offset

Although the lump-sum payment of the Offset is subject to taxation in the hands of a living Class Member pursuant to paragraph 6(1)(f), it is our view that the amount is not a source of income to the surviving spouse, dependents or the estate of the deceased Class Member. Accordingly, where the lump-sum Offset is paid to the surviving spouse, dependents or the estate of the deceased Class Member, it will not be taxable in their hands.

B. Credit for Interest on Potential Tax Payable

It is also our view that the Credit for Interest on Potential Tax Payable is not a source of income if paid to the surviving spouse, dependents or the estate of the deceased Class Member. As such, although the Credit for Interest on Potential Tax Payable is taxable if received by a living Class Member pursuant to paragraph 6(1)(a), the amount is not taxable in the hands of the surviving spouse, dependents or the estate of the deceased Class Member.

C. Interest Income

The pre- and post-judgment interest received by the surviving spouse, dependents or the estate of the deceased Class Member is subject to tax in their hands by virtue of paragraph 12(1)(c), without regard to whether the other Settlement Amounts are subject to tax.

We hope this information is of assistance to you.

Yours truly,

Steve Fron, CPA, CA
Manager, Trust Section II
Financial Industries and Trusts Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch

FOOTNOTES

Note to reader: Because of our system requirements, the footnotes contained in the original document are shown below instead:

1 Reference to the terms “spouse” and “dependent children” are as defined in Part I of SISIP Policy 901102.