Regulation 103 - Non-Periodic Payments

The Directorate noted that Reg. 103(4) rather than Reg. 102(1) applied where a retiring allowance was paid in instalments, so that a statement in Guide T4001 was to be preferred to 2002-0135807. Thus, if instalment payments for the retiring allowance were spread over more than one year, the withholding would be determined on an annual basis.

The will of a deceased taxpayer, who had been a member of a registered pension plan ("RPP"), provided for the bequest of all his property to his dependent minor daughter, with an infirmity and six years of age, as sole legatee. All such bequeathed property was to be retained in the estate until she attained 25 years, but with rights of encroachment by the executor. In the year of the death, the deceased's RPP will pay the estate $140,000 as a lump sum under the RPP.

Can the full $140,000 to be received by the daughter as a lump sum from the RPP be transferred directly to a RRSP without withholding at source? After discussing the s. 104(27) designation to preserve the character of such payment as being out of the RPP, CRA stated:

Subsection 103(4) of the … ITR … provides for the withholding rates that apply where a payment is made in the form of a "lump sum payment" by an "employer" to an "employee". For these purposes, under ITR subsection 100(1), “employer" means any person paying "remuneration", "employee" means any person receiving "remuneration" and "remuneration" includes any payment that is in respect of a superannuation or pension benefit. Under ITR paragraph 103(6)(a), a payment described in subparagraph 40(1)(a)(i) or (iii) or paragraph 40(1)(c) of the Income Tax Application Rules (footnote 2) constitutes a "lump sum payment" for the purposes of ITR subsection 103(4). A single payment made out of a superannuation or pension plan on the death of an employee or former employee is a payment described in subparagraph 40(1)(a)(i ) of those Rules. We are therefore of the view that the administrator of an RPP must withhold income tax in accordance with the provisions of ITR subsection 103(4) when making a direct payment to the RRSP of a minor child, who is an heir of the estate of a member, of a single payment in respect of a superannuation or pension benefit as a result of the member's death.

On the intestacy of the taxpayer in 2010, who was a member of a registered pension plan ("RPP") and had made no valid beneficiary designation at the RPP level, the estate received a net amount of $110,000 under the RPP ($200,000 less withholding taxes of $90,000), which was distributed equally to the three adult children.

Is there an obligation to withhold taxes when making a lump sum payment following the death of a member of an RPP either to the beneficiary of the RPP or to the member’s estate, given that no payment has been made to an employee as provided in ITR ss. 103(4) and (5), which concern in particular lump-sum pension payments. Where there has been a withholding, can the taxes withheld at source on the lump sum payment can be allocated among the various taxpayers in the same proportions as the amounts on which they are taxed? CRA responded:

[U]nder ITR subsection 100(1), "employer" means any person paying "remuneration", "employee" means any person receiving "remuneration" and "remuneration" includes any payment that is in respect of a superannuation or pension benefit. Under ITR paragraph 103(6)(a), a lump sum payment made under a pension fund or superannuation or pension plan on the death of an employee or former employee constitutes a "lump sum payment" for the purposes of ITR subsection 103(4). … [C]onsequently … the administrator of an RPP who pays, to a member's estate, a lump sum payment of a superannuation or pension benefit as a result of the member's death, must withhold tax pursuant to ITR subsection 103(4).

… [N]o provision … allows allocations or designation of tax deductions between a trust and its beneficiaries. When the estate completes its …T3 … the tax withheld will be taken into account in determining the balance owed by the estate or [its] refund … .

A similar result would apply to amounts paid on death out of a DPSP.

Upon an election by a taxpayer to receive a lump sum payment out of an RRSP, the withholding tax is calculated with respect to the payment made at that time and not on a cumulative basis.

A retirement compensation arrangement (RCA) consists of a supplementary retirement plan (for one employee) that has developed surplus that the employer wishes to withdraw. The Directorate stated:

A “lump sum payment” is defined for the purposes of subsection 103(4) in subsection 103(6) of the Regulations. Unless an RCA is a superannuation or pension plan that is being wound up, a payment of surplus from an RCA to an employer is not a “lump sum payment” under this definition (see paragraph 103(6)(a) of the Regulations and clause 40(1)(a)(i)(B) of the Income Tax Application Rules).

Since the Payment is not a “lump sum payment” for the purposes of the withholding rules, it is subject to subsection 102(1) of the Regulations. … Since Schedule I does not address this situation, the Payment is subject to subsection 106(1). Under this rule, withholding is generally based on the amount of tax that may reasonably be expected to be payable under the Act by the recipient with respect to the payment.

No amount of tax is required to be withheld by the payer of a lump sum payment to a Canadian resident out of an RRSP after the death of an annuitant.