Words and Phrases - "in lieu of"

A survivor benefit under a registered pension plan (“RPP”) is paid in a taxation year to the Direction principale des biens non réclamés [the Unclaimed Property Directorate] ("DPBNR") pursuant to the Québec Unclaimed Property Act (“UPA”) because the person entitled thereto (the surviving spouse or the beneficiary of a deceased RPP member) are unknown at the time. In a subsequent taxation year, the person who was entitled to receive the survivor benefit (“right-holder”), now identified, claims the amount and receives from the DPBNR the net amount that it, in turn, had received from the RPP (i.e., the survivor benefit payable under the RPP, as reduced by federal and provincial income tax withheld at source) as further reduced by its administration fee.

What amount is to be included in the right-holder’s income, and in what year? What if it is an estate that would have been entitled to receive the amount, but the administration of the estate has been completed prior to the DPBNR being in a position to make the payment?

The Rulings Directorate indicated that the amount to be included under s. 56(1)(a)(i) is the gross amount of the survivor benefit payable under the RPP, as indicated in the T4A slip issued by the RPP administrator, which should be included for the taxation year in which the DPBNR has transferred that amount to the right-holder. In this regard, CRA stated:

To the extent that, at the end of a particular taxation year in which the DPBNR receives a survivor benefit, the right-holder is not clearly identified, the facts as they exist at the end of the taxation year do not permit the inclusion of the survivor benefit in computing a taxpayer's income.

However, respecting the subsequent year of payment of the amount by the Directorate to the now-identified right-holder, CRA stated:

[T]he words "in lieu of" include not only payments having the legal character of a superannuation or pension benefit, but also payments which constitute a reasonable substitute paid instead or in lieu of a superannuation or pension benefit. … [The subsequent year’s payment] is paid to the right-holder in lieu of a superannuation or pension benefit to which the right-holder would otherwise have been entitled, had it not been for the application of the UPA … [and] is to be included in the computation of the right-holder’s income for the year in which the DPBNR pays it to the right-holder.

Where the right-holder is an estate, it should include the survivor benefit under s. 56(1)(a)(i) in computing its income for the year of receipt – but with a deduction to it and an inclusion to its beneficiaries being applicable where those amounts are distributed in accordance with the usual ss. 104(6), (13) and (24) rules. The Directorate went on to state, respecting where the administration of the estate has been completed prior to the DPBNR being in a position to pay the amount:

[T]he CRA will not object to the beneficiaries of the estate who are entitled … to all or part of the survivor benefit amounts being considered to have received those amounts directly from the DPBNR. The same applies if an heir to such an estate has also been deceased for a period of time, and the executor of that heir’s estate had been discharged from that estate’s administration before the DPBNR was able to pay to that executor the amount due. If so, it is pursuant to subparagraph 56(1)(a)(i) that the amounts received or considered received by the beneficiary(ies) of the estate are to be included in computing the beneficiary(ies)’ income.