7 November 1991 Income Tax Severed Letter - Equalization Pay Benefits Payable to a Deceased Employee

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.

Subject: Ministerial Correspondence
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We are responding to your memorandum of August 10, 1990 in which you requested our views concerning the tax treatment of equalization pay benefits payable to a deceased employee.

Treasury Board announced, on January 26, 1990, the agreement to make such payments to affected employees who were employed at any time in the period from April 1, 1985 to March 31, 1990. XXX

In view of the fact that there are a large number of affected employees who are receiving payments in 1990 you have requested our opinion with respect to three of the possible situations involving deceased taxpayers.

• 1. Where the employee died prior to the signing of the instrument which contained the agreement to issue the payment.
• 2. Where the employee died after the signing of the instrument but before the payment was made.
• 3. Where the employee died after the payment was received.

The first situation describes the case at hand. We have had a recent opportunity to review a similar case scenario referred to us by Enquiries and Taxpayer Assistance Division involving a pay and equity award within the federal civil service. We have enclosed a copy of our response to that previous enquiry. You will note that the conclusion drawn in that instance was that subsection 70(1) of the Income Tax Act (the "Act") was considered to apply to the subsequent payment and the amount was technically required to be reported on the final return of the deceased employee.

Subsection 70(1) deals with the types of income that are normally payable on a periodic basis, such as rents, interest, etc. and includes remuneration from employment. This subsection further provides that in computing the income to be reported on the deceased taxpayer's final return the amounts accruing since the last periodic payment to the date of death are deemed to accrue in equal daily and that the amount determined to have accrued up to the date of death but not yet paid is the amount to be so reported. The equalization payment is a remuneration from employment.

We note that the wording in subsection 70(1) does not contain the requirement that for the provision to apply the amounts must be considered accrued at the time of the employee's death. Thus a payment made in a subsequent year that is in respect of remuneration from employment for a period up to the date of the employee's death is a payment to which subsection 70(1) applies even though the existence of the payment is not known at the time of the employee's death.

Since at the time of the employee's death no right to the payment described above had yet been established the provisions of subsection 70(2) would not be applicable.

You have expressed the view that the amounts should be taxable in the hands of the beneficiaries in accordance with subsection 104(28). This provision applies to amounts received by a testamentary trust that are in recognition of the employee's service in an office or employment. The term "in recognition of his service in an office or employment" refers to amounts payable by the employer as a consequence of the employee's cessation of employment, in recognition of past services provided. The same phrase is used in the definitions of "death benefit" and "retiring allowance" contained in subsection 248(1) of the Act. The equalization payment is not considered to be a payment in recognition of his service in employment paid as a consequence of the cessation of employment caused by the employee's death but rather as salary or wages earned in the course of employment.

With respect to the second situation set out above we would advise that since the signing of the instrument authorizing the payment occurred prior to the employee's death an immediate right to payment was established which was not paid at the time of the employee's death. In our view, therefore, subsection 70(2) of the Act would be relevant to that amount, once determined.

With respect to the third situation presented where the payment is received by the employee before the date of death the amount is treated as being received as salary or wages in the ordinary course of employment.

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I hope that the foregoing comments will be of assistance to you in responding to the Ministerial enquiry.