Principal Issues: [TaxInterpretations translation] (1) Is a lump sum paid by a corporation to the estate of a retiree to be included in computing the income of the person who receives it? Alternatively, if the lump sum is paid directly to the retiree before the retiree’s death, what is the tax treatment accorded to it?
(2) Respecting the lump sum, is the corporation required to deduct at source pursuant to subsection 153(1)?
Position: In the first scenario, the lump sum represents a death benefit. In the second scenario, the lump sum amount is to be included in the calculation of the retiree's income under either paragraph 6(1)(a) or subsection 6(4).
Reasons: The Income Tax Act.
XXXXXXXXXX 2010-035917
July 21, 2011
Dear Sir,
Subject: Lump sum payments to retirees
This is in response to your letter of March 3, 2010 in which you asked for our opinion on the tax treatment to be given to a lump sum that would be paid either to the estate of a retiree or to the retiree prior to the retiree’s death. We apologize for the time required to answer your question.
Unless otherwise indicated, all statutory references herein are to the provisions of the Income Tax Act ("the Act").
We have summarized below the facts that we consider the most relevant:
- A number of years ago, a taxable Canadian corporation ("Taxpayerco") carried on an active business and had a number of employees;
- While carrying on its business, Taxpayerco committed and contracted to maintain a group term life insurance policy for all of its employees, both while they were active and while they retired;
- That obligation arose from either the employment contract or the collective agreement, depending on whether or not the employee involved was a Taxpayerco executive.
- Taxpayerco subsequently transferred all of its operations, including all of its employees, to a limited partnership (SEC), of which it became a limited partner;
- Taxpayerco continued to bear the costs of the group term life insurance policy for the benefit of its retired employees;
- Subsequently, term group life insurance policies contracted and maintained for the benefit of employees and retirees were discontinued;
- In lieu of taking out a new group term life insurance policy for the benefit of retirees, Taxpayerco itself assumed the financial obligation previously delegated to the insurers.
You are seeking our comments on the following two scenarios that affect only those employees who were retired as of the date of the transfer of Taxpayerco’s operations to SEC:
(1) Upon the death of a retiree, Taxpayerco may decide to pay, to the estate of the retiree or specifically designated beneficiaries, an equivalent amount (the "lump sum") to the death benefit initially provided for in the abandoned group life insurance policy;
(2) Alternatively, Taxpayerco may decide to pay the lump sum directly to a retiree prior to the retiree’s death.
You wish to receive answers to the following two questions:
(1) What would the tax treatment be of the lump sum paid by Taxpayerco under Scenario 1 or Scenario 2?
(2) Would it be necessary for Taxpayerco to make source deductions pursuant to subsection 153(1) respecting the lump sum?
Our Comments
The situation described in your letter appears to be an actual situation involving a specific taxpayer. As stated in paragraph 22 of Information Circular 70-6R5 of May 17, 2002, it is our practice not to issue a written opinion on proposed transactions otherwise than through advance rulings. Furthermore, when it comes to determining whether a completed transaction has received adequate tax treatment, that determination is made first by our Tax Services Offices as a result of their review of all facts and documents, which is usually performed as part of an audit engagement. However, we can offer the following general comments which we hope will be helpful to you.
Scenario 1
Based on the facts you have described to us, we are of the view that the lump sum contribution by Taxpayerco to a retiree's estate or specifically designated beneficiaries would be a death benefit pursuant to subsection 248(1). Indeed, we believe that the definition of that term in subsection 248(1) is broad enough to include the lump sum that Taxpayerco proposes to pay on the death of a retiree. Such a benefit is to be included in income under subparagraph 56(1)(a)(iii).
Pursuant to subsection 248(1), if a taxpayer receives the total of all amounts of a death benefit and the taxpayer is
- the only person who has received such an amount;
- the surviving spouse or common-law partner of the employee,
the amount of the death benefit that will not be included in the surviving spouse or common-law partner’s income will be the lesser of:
- the total of all amounts received by the surviving spouse or common-law partner in the year;
- the amount, if any, by which $10,000 exceeds the total of all amounts received by the surviving spouse or common-law partner in preceding taxation years.
Scenario 2
We believe that any amount paid to a retiree by Taxpayerco should be included in computing the retiree’s income under either section 5 or section 6.
In this case, we believe that the payment made by Taxpyerco to a retiree, while the latter is still alive, arises necessarily from the retiree’s employment with Taxpayerco.
Source Deductions
Where the lump sum is taxable, as noted above, source deductions will have to be made pursuant to subsection 153(1).
Best regards,
François Bordeleau, LL.B.
Manager
Business and Partnerships Section
Business and Partnerships Division
Income Tax Rulings Directorate