Principal Issues: An estate receives a corrective lump sum GIS payment in respect of the deceased. 1) What are the tax consequences of that payment? 2) Is there a requirement to report the income where a clearance certificate was previously issued?
Position: 1) The lump sum payment is required to be included in the income of the estate the year it is received. Alternatively, where the criteria under subsection 70(2) are met, a rights or things return may be filed. Regardless of how the income is reported a paragraph 110(1)(f) deduction is available in calculating taxable income which usually renders such payments non-taxable. 2) Yes
Reasons: 1) Clause 56(1)(a)(i)(A) requires the lump sum payment to be included in the income of the estate. The GIS payment is a right or thing of the deceased, the nature of the payment does not change when it is paid to the estate as a corrective lump sum amount .Where the amount is included on a rights or things return it may reduce certain deductions or credits. 2) A clearance certificate covers only the properties controlled by the executor from the date the executor took control of the estate to the date the clearance certificate was requested. If additional property is discovered the executor must request another clearance certificate in respect of that property.
April 13, 2016
Sheila Barnard Income Tax Rulings Directorate Manager Financial Industries and Trusts Division Legislation Section Julie White Program Support and Services Division (905) 721-5202 Individual Returns Directorate Assessment, Benefit and Service Branch 2015-061520
Corrective payments of the Guaranteed Income Supplement to deceased recipients
This is in response to your email in which you requested our comments on the income tax implications of a corrective lump sum payment of the Guaranteed Income Supplement (GIS) to be paid by Service Canada to recipients who are now deceased.
It is our understanding that the corrective lump sum payments were made (or will be made) to Old Age Security clients who have been identified by Service Canada as not receiving their full entitlement to the GIS benefits. The underpayment to certain individuals was identified when recent system changes were made by Service Canada to automate certain GIS processes.
You have also asked if a clearance certificate previously issued to an executor of an estate will have an impact on the outcome.
The GIS is a supplement paid under the Old Age Security Act (OASA) to low income seniors who are eligible for the Old Age Security Pension (OAS) and as such is included in income under clause 56(1)(a)(i)(A) of the Income Tax Act (the Act). However, an offsetting deduction in computing taxable income is available under paragraph 110(1)(f) of the Act which effectively renders such payments non-taxable.
Clause 56(1)(a)(i)(A) requires a recipient of a payment under the OASA to include the payment in income in the year it is received. In this case, it is the estate of the deceased that is in receipt of an amount under the OASA and as a result it is the estate that is required to include the lump sum corrective amount in income. The estate can deduct the amount received from its income pursuant to paragraph 110(1)(f) in determining the taxable income of the estate. Paragraph 110(1)(f) deducts from taxable income any social assistance payment made on the basis of a means, needs or income test that was included in income because of clause 56(1)(a)(i)(A). There is no provision in the Act that would prevent an estate from deducting the lump sum payment under paragraph 110(1)(f). Where the amount is subsequently paid to the beneficiaries of the estate, it will be considered a non-taxable capital distribution of the estate.
You queried whether the payment would be considered a “right or thing” pursuant to subsection 70(2) of the Act. For an amount to be considered a right or thing the deceased must have had a clear right to the amount at the time of death. If the deceased had no proprietary interest or clear right to the amount at that time, then the amount would not qualify as a right or thing under subsection 70(2). The lump sum payment represents the GIS payments that would have been paid to an individual before their death, were it not for the underpayment. It appears that there is no question that an individual would have otherwise been entitled to the amounts in the applicable year(s); therefore, the lump sum amount can be considered a right or thing.
Where an executor receives a corrective GIS lump sum payment on behalf of the deceased’s estate, he may where he so elects, in accordance with subsection 70(2) of the Act, file an optional rights or things return in respect of the deceased. Subsection 70(2) does not change the nature of the lump sum amount; it represents GIS payments related to earlier years. The corrective lump sum payment will be included in income in the rights or things return and a corresponding deduction under paragraph 110(1)(f) will generally be available. As the amount received will be included in the determination of total income on the rights and things return it may impact certain deductions or non-refundable tax credits available in that return. The optional rights and things return must be filed by the later of 90 days after the sending of the notice of assessment or notice of reassessment for the final return; and one year after the date of death.
An executor, as the legal representative of the estate, is required pursuant to subsection 159(2) of the Act to obtain a clearance certificate before distributing property that they control. Where the executor fails to obtain a clearance certificate they are liable for any unpaid amounts under the Act in respect of any property distributed. Information Circular 82-6R11 Clearance Certificates at paragraph 13 states;
A clearance certificate covers only the properties you controlled from the date you received control to the date you asked for the clearance certificate. After you receive a clearance certificate you may discover another property that affects the amount of income or capital gains you reported on the taxpayer’s return(s). If so, you will have to get another clearance certificate before you distribute the newly identified property.
We also refer you to paragraphs 2 to 6 of the IC, which discuss why a legal representative would obtain a clearance certificate.
We trust our comments will be of assistance to you.
Steve Fron CPA, CA
Manger, Trust Section II
Financial Industries and Trusts Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch
Canada Revenue Agency
cc: Yves Thivierge
Mychèle Malette