Principal Issues: [TaxInterpretations translation] 1) Can subsection 104(13.1) apply so that amounts received by an estate under an RPP or a DPSP in a taxation year and paid or payable to beneficiaries in the same taxation year are taxed either at the estate level or at the beneficiary level, or partly at the estate level and partly at the beneficiary level?
2) Do tax deductions have to be made when a lump sum payment is made following the death of an employee participant in an RPP or DPSP to the employee’s estate?
3) Can the source deductions made when the money is paid to the estate be divided between the estate and the beneficiaries in the same proportions as the amounts on which they are withheld?
Position: 1) Yes.
2) Yes.
3) No. The tax withheld will be taken into account in determining the balance owing by the estate or repayment to which it is entitled, which reimbursement, if any, may be distributed to the beneficiaries.
Reasons: 1) The wording of subsection 104(13.1).
2) A pension or pension benefit, such as a payment under a DPSP, constitutes "remuneration" paid by an "employer" to an "employee" as defined in subsection 100(1) ITR.
3) No provision of the law allows such a division.
Financial Strategies and Financial Instruments Roundtable-- 2010 APFF Conference
Question 11
Death of an individual and lump sum payment to the estate under a registered pension plan (RPP)
A taxpayer died in 2010 without a spouse and without a will. The taxpayer was a member of a registered pension plan ("RPP"). No valid beneficiary designation had been made at the RPP level in the event of death.
In 2010, the estate received a net amount of $110,000 under the RPP ($200,000 less withholding taxes of $90,000). This being an intestate succession, it was ultimately the three adult and financially independent children of the deceased who inherited their respective share (1/3) and they received that amount in 2010.
Questions to the CRA
i) Can the CRA confirm that it would be possible to tax all amounts received by the estate either in the estate or in the hands of the beneficiaries (if the amounts were paid to the beneficiaries or were payable to them), or through a combination of those two possibilities (partly in the estate, partly in the hands of the heirs) through the designation under subsection 104(13.1)?
ii) Can the CRA confirm that there is no 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? It is our understanding that no amount should be withheld as the payment has not been made to an employee as provided in ITR subsections 103(4) and (5), which concern in particular lump-sum pension payments.
iii) Where there has been a withholding, can the CRA confirm that 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?
iv) Can allocation of withholding taxes be made otherwise?
v) Would the answers to the previous questions apply in the same way in the case of a deferred profit sharing plan ("DPSP")?
CRA Response
Where an estate (considered a trust for the purposes of the Act) receives an amount in respect of a superannuation or pension benefit, it must include that amount in computing its income under subparagraph 56(1)(a)(i). Subsection 104(13) provides that a beneficiary of a trust, other than a trust referred to in paragraph (a) of the definition “trust” in subsection 108(1), must include in computing the beneficiary’s income for the year, such part of the income of the trust as became payable to the beneficiary in the year. Furthermore, paragraph 104(6)(b) provides that there may be deducted in computing the income of a trust for a taxation year, the amount that the trust claims not exceeding the amount that is the income of the trust that became payable to a beneficiary in of the year. Subsection 104(24) specifies the circumstances in which an amount became payable in a year. The question of whether an amount that has not been paid to the heirs in 2010 may be considered to be payable to them in 2010 within the meaning of subsection 104(24) is a question of law, which can only be determined after a thorough analysis of the provisions governing intestate succession. Such an analysis goes beyond the scope of this response.
The deduction provided for in paragraph 104(6)(b) in respect of income payable to a beneficiary is discretionary; the trust may claim less than the amount determined under that paragraph. Where the trust deducts less than the amount of income payable to the beneficiaries, subsections 104(13.1) and 104(13.2), depending on the type of income, allow the trust to designate an amount to a beneficiary according to the computations provided in those subsections, which amount will not be considered to have been paid or become payable during the year so that the beneficiary will not have to include it in the beneficiary’s income. The ability to designate an amount to a beneficiary under subsection 104(13.1) effectively allows the trust to be subject to tax on that income even where it has been paid or is payable to the beneficiaries.
In the situation described, the designation under subsection 104(13.1) could thus ensure that all amounts received by the estate in 2010 for the purposes of the Act (or $200,000) is taxed at the estate level, although all or a portion of those amounts were paid or payable to the heirs in 2010. Similarly, the designation under subsection 104(13.1) could ensure that amounts received by the estate in 2010 and paid or payable to the heirs in 2010 are taxed partly at the estate level and partly at the level of the heirs, to the extent that the amount designated to each heir under subsection 104(13.1) does not exceed the amount computed in accordance with the formula provided for in that provision. If no designation was made under subsection 104(13.1), the provisions of subsection 104(13) and paragraph 104(6)(b) could ensure that all amounts received by the estate and paid or payable to the heirs are taxed at the level of the heirs.
By virtue of ITA paragraph 153(1)(b), every person paying in a taxation year a superannuation or pension benefit must withhold tax in accordance with the prescribed rules. ITR subsection 103(4) provides for the withholding rates that apply where a payment is made in the form of a "lump sum" 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 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). We are consequently of the view that 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).
To our knowledge, no provision of the Act, allows allocations or designation of tax deductions between a trust and its beneficiaries. When the estate completes its "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 this regard, we refer you to Lines C, D and 86 of T4013 T3 Trust Guide, which states the following: " Do not allocate the tax that was withheld to the beneficiaries". In the event that the estate receives a refund, it could subsequently distribute the amount of the refund received to the beneficiaries in accordance with the rules governing intestacy.
Our comments would be essentially the same if the amounts received by the estate were paid under a DPSP, subject to the following comments. An amount received by an estate under a DPSP must generally be included in computing its income under paragraph 56(1)(i). Under paragraph 153(1)(h), a person who makes a payment under a DPSP must withhold tax in accordance with the prescribed rules. For the purposes of ITR subsection 103(4), "remuneration", as defined in ITR subsection 100(1), includes any payment made under a DPSP. Paragraph 103(6)(b) ITR provides under what circumstances a payment made under a DPSP constitutes a "lump sum payment" for the purposes of ITR subsection 103(4).
Mélanie Beaulieu
(613) 957-9226
October 8, 2010
2010-037192.