Principal Issues: [TaxInterpretations translation] 1) Does subsection 104(13) apply in a particular context involving a testamentary trust?
2) Do subsection 104(27) and paragraph 60(l) apply in a specific testamentary trust context?
3) Should a withholding tax be made when an amount is transferred directly from an RPP to the RRSP of a minor child?
4.1) What amount can be deducted by virtue of paragraph 60(l)?
4.2) Can the withholding tax on an amount received by a trust be allocated to the beneficiary of the trust?
Position: 1) General comments
2) General comments
3) Yes, in the situation described
4.1) Subject to the maximum stated in subparagraph 60(l)(v), a taxpayer may deduct the amount paid as a premium by virtue of an RRSP of which the taxpayer is the annuitant.
4.2) No
Reasons: 1) Question of fact
2) Question of fact
3) s.153(1)(b) of the Act and 103(4) of the Reg.
4) No provision of the Act allows the allocation or designation of tax withholdings between a trust and its beneficiaries.
FINANCIAL STRATEGIES AND FINANCIAL INSTRUMENTS ROUNDTABLE, 7 OCTOBER 2011
2011 APFF CONFERENCE
Question 13 - Death of an individual and lump sum payment from a registered pension plan to the estate to a minor with a disability
A taxpayer died in 2011 without a spouse or common-law partner but with a will. He was a member of a registered pension plan ("RPP"). No valid beneficiary designation was made at the RPP level for the event of death.
The taxpayer's will provided for the bequest of all his property to his dependent minor daughter, with a disability and six (6) years of age, as sole legatee.
Since the taxpayer's daughter was a minor, the taxpayer's will provided that all the bequeathed property had to be retained in the estate until his daughter attained the age of twenty-five (25) years, with the right of encroachment on capital and income by the executor, at his discretion, for the maintenance of the taxpayer’s minor daughter.
In 2011, the deceased's RPP plans to pay the estate $140,000 as a lump sum under the RPP.
By virtue of paragraph 60(l), the daughter of the deceased may deduct from her income the full lump sum received from the RPP, if that amount is contributed to a registered retirement savings plan ("RRSP").
Questions to the CRA:
1. If the amount of $140,000 received by the estate from the RPP is paid to the daughter, can the CRA confirm that subsection 104(13) will apply?
2. Can the CRA confirm that a designation under subsection 104(27) will ensure that the income received by the daughter will retain its character as pension income for the purpose of the RPA deduction amount under paragraph 60(l)?
3. 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?
4. Suppose that 35% in withholding tax is required on that payment in the amount of $49,000 (35% x $140,000).
4.1) Will the daughter be able to contribute $140,000 to her RRSP and deduct it under paragraph 60(l) if the estate distributes the amount of the withholding to her as capital?
4.2) Can the withholding tax of $49,000 be allocated to the lump sum of $140,000 received by the daughter?
CRA Response
The CRA cannot confirm the tax treatment of a specific situation other than as part of an advance income tax ruling request where all facts and relevant documents are provided to it. The following comments may not apply to a specific situation.
CRA Response to Question 1:
Where an estate (considered to be a trust for the purposes of the ITA) receives an amount in respect of a superannuation or pension benefit, it must include that amount under subparagraph 56(1)(a)(i) in computing its income. Paragraph 104(13)(a) provides that a beneficiary of a trust that is not referred to in paragraph (a) of the definition of "trust" in subsection 108(1) must include in computing the beneficiary’s income for the year, the portion of the trust’s income as became payable in the trust’s year to the beneficiary. Subsection 104(24) specifies the circumstances in which an amount became payable in a year. In addition, it appears to us that the application of subsection 104(18) should be considered.
CRA Response to Question 2:
Unless an express provision of Act preserves the nature of income, paragraph 108(5)(a) provides that an amount included in computing the income for a taxation year of a beneficiary of a trust under subsection 104(13) will be deemed to be income from a property that is an interest in the trust and not from any other source.
Subsection 104(27) permits the transfer to a beneficiary of a testamentary trust resident in Canada of the characterization of certain pension benefits received by the trust and that it is reasonable to consider to be part of the amount that, by reason of subsection 104(13), was included in computing the income of the beneficiary.
To that end, the amount included in computing the income of a beneficiary of the trust by virtue of subsection 104(13) must be part of a distribution of the income of the trust. Where the trust makes a capital distribution, subsection 104(13) does not apply to that distribution. For example, where the trust advances an amount of capital to a beneficiary, subsection 104(13) is not applicable to that advance and, as such, the requirements of subsection 104(27) are not satisfied. In order to determine what type of distribution a trust has made, a complete analysis of the facts and provisions of the will is necessary.
By virtue of subparagraph 104(27)(c)(i), where a testamentary trust receives a benefit under an RPP, the beneficiary's share in the trust of the benefit (with the exception of any portion of that the amount that relates to an actuarial surplus) is deemed, for the purposes of paragraph 60(l), to be an amount from an RPP that is included in computing the recipient's income for a particular year in respect of payment referred to in clause 60(l)(v)(B.01) if the following conditions are satisfied:
- The testamentary trust was resident in Canada throughout its taxation year.
- Such trust indicated in its income tax return filed for the year under Part I of the Income Tax Act, the beneficiary's share, equal to the portion of the benefit, that it did not designate to any of its other beneficiaries.
- It is reasonable to consider the recipient's share to be part of the amount that, pursuant to subsection 104(13) was included in computing the beneficiary's income for a particular taxation year.
- The benefit is a single amount within the meaning of subsection 147.1(1).
- The single amount was paid to the trust as a consequence of the death of the settlor of the trust.
- The beneficiary was, immediately before the death of the settlor of the trust, the child or grandchild of the settlor and financially dependent on the settlor because of a mental or physical infirmity.
CRA Response to Question 3:
By virtue of ITA paragraph 153(1)(b), a person who pays superannuation or pension benefits in a taxation year must withhold tax in accordance with the prescribed rules. Subsection 103(4) of the Income Tax Regulations (footnote 1) ("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.
CRA Response to Question 4:
Under paragraph 60(1), where a taxpayer is the child or grandchild of a deceased individual and was financially dependent on the individual because of a mental or physical infirmity, and receives a payment under an RPP as a consequence of the death of the individual, the taxpayer may deduct in computing the taxpayer’s income the amount included in computing the taxpayer’s income an amount that the taxpayer pays as a premium out of or under an RRSP of which the taxpayer is the annuitant. The amount that may be deducted shall not exceed the sum of different amounts, one of which is the payment that the taxpayer received out of or under an RPP as a consequence of the death of an individual and that was included in computing the taxpayer’s income for the year. If no other amount described in subparagraph 60(l)(v) is included in computing the taxpayer's income, we are of the view that the maximum amount that may be deducted under paragraph 60(l) is the portion of the payment that the taxpayer received under an RPP as a consequence of the death of an individual and which is included in computing the taxpayer’s income for the year. For this purpose, the presumption in paragraph 104(27)(c) applies to determining whether the payment is described in clause 60(l)(v)(B.01). As previously stated, whether the amount is determined under paragraph 104(27)(c) requires an analysis of the facts and provisions of the will.
We are not aware of any provisions of the Act permitting the division or allocation of tax withholding between a trust and its beneficiaries. Where an estate completes Form T3RET T3 Trust Income Tax and Information Return, the tax withheld will be taken into account in determining the balance owed by the estate or refund to which it is entitled. In that regard, we refer you to the paragraph entitled " Lines C, D, and 86 – Total tax deducted” in T3 Trust Guide T4013, which states: "Do not allocate the tax that was withheld to the beneficiaries.”
Catherine Ayotte
2011-042078
FOOTNOTES
Due to our system requirements, footnotes contained in the original document are reproduced below:
1 Consolidated Regulations of Canada c. 945. as amend.
2 R.S.C., 1985, c. 2 (5th Supp.) as amend.