Principal Issues:
Could an amount paid by an employer to an employee's estate after his death, be rolled directly to the beneficiary's registered retirement savings plan under paragraph 60(j.1) of the Income Tax Act?
Position:
Question of fact. Possible if the amount is a retiring allowance.
Reasons:
The determination of whether the amount is a retiring allowance or a death benefit is a question of fact. However, if the amount is a retiring allowance received by an estate after the death of a retired employee, subsection 104(28) deems the amount to be received by the beneficiary. In these circumstances, the beneficiary may transfer the amount eligible under paragraph 60(j.1) of the Act to the beneficiary's RRSP.
XXXXXXXXXX 2008-030426 I. Landry, M. Fisc. March 24, 2009
XXXXXXXXXX ,
Subject: Amount paid to the Employee's Estate
This is in response to your email of December 17, 2008 in which you requested our comments on whether an amount paid by an employer to an employee's estate could be rolled directly to the beneficiary's registered retirement savings plan ("RRSP") under paragraph 60(j.1) of the Income Tax Act (the "Act").
More specifically, you describe the situation of an employee on long term disability that died while he was receiving employer funded health benefits. Pursuant to the agreement between the employee and the employer, the employee had the right to receive a $20,000 retiring allowance upon retirement at the age of 65. The employee would have reached the age of 65 in 2013. This retiring allowance has to be paid to the employee based on the fact that the operation that he was employed at was permanently closed in 2005. Since the employee's death, the payment is payable to the employee's estate.
Unless otherwise stated, all statutory references in this letter are references to the provisions of the Act.
The particular situation outlined in your email appears to relate to a factual one, involving a specific taxpayer. Written confirmation of the tax implications inherent in particular transactions is given by this Directorate only where the transactions are proposed and are the subject matter of an advance income tax ruling request submitted in the manner set out in Information Circular 70-6R5, Advance Income Tax Rulings, dated May 17, 2002. Where the particular transactions are completed, the inquiry should be addressed to the relevant tax services office. We are, however, prepared to offer the following general comments, which may be of assistance.
A retiring allowance is defined in subsection 248(1) to mean an amount received by a taxpayer on or after retirement from an office or employment in recognition of the taxpayer's long service or in respect of a loss of office or employment of a taxpayer but excludes an amount received as a consequence of the death of an employee.
A death benefit is defined in subsection 248(1) to be an amount received (hereinafter referred to as "gross amount") by a taxpayer in a taxation year on or after the death of an employee in recognition of the employee's service in an office or employment less an amount of up to $10,000.
In the situation you describe, the amount to be paid to the employee was based on the fact that the operation that he was employed at was permanently closed in 2005. This fact in and of itself does not permit us to conclude that the $20,000 payment is a retiring allowance.
In this regard, we would refer you to paragraph 7 of Interpretation Bulletin IT-337R4, Retiring Allowances, wherein it states:
"Where an individual continues to accrue salary and benefits until a date that is subsequent to the date the individual ceases to report to work, the retirement or the loss of office or employment, as the case may be, will be considered to take place only at the later date."
In our view, where an employee is on long term disability and is receiving benefits from the employer funded health plan, he may still be considered an employee of the employer and would not be considered to have retired or terminated his employment. For example, if the employee was accruing pension benefits under your pension plan while on long term disability, then the employee would still be considered an employee of the employer. The determination of whether an amount paid by an employer to an employee's estate is a retiring allowance is a question of fact. In order to make such a determination, it is necessary to review all the relevant facts and documents surrounding a particular situation which can only be done in the context of an advance income tax ruling.
Secondly, if the amount is paid in recognition of long service, the determination of whether the amount to be paid is a retiring allowance or a death benefit will depend on the relationship between the employee and the employer at the time of his death. In this regard, we would refer you to paragraph 5 of Interpretation Bulletin IT-508R, Death Benefits, which states:
"If an employee ceased employment and was entitled to receive a retiring allowance but dies before the payment is made, the subsequent payment of the amount to a beneficiary of the deceased is included in the recipient's income under subparagraph 56(1)(a)(ii) as a retiring allowance. The tax treatment of a retiring allowance is discussed in the current version of Interpretation Bulletin IT-337, Retiring Allowances.
If an employee dies while still employed by the employer, and that employee was contractually entitled to receive a retiring allowance upon retirement, the severance pay received by a beneficiary of the deceased, on or after death of that employee, qualifies as the gross amount of a death benefit."
In a situation where a taxpayer remains an employee while on long term disability but has the right to receive an amount on retirement from employment at the age of 65 in recognition of the taxpayer's long service but the taxpayer dies prior to reaching 65, it is our general view that the amount received by the estate would be a death benefit.
Regarding the possibilities to roll the paid amount directly to the beneficiary's RRSP, it cannot be transferred to the beneficiary's RRSP if the amount is not a retiring allowance. However, if the amount is a retiring allowance in accordance with subsection 248(1) and it is received by an estate after the death of a retired employee, subsection 104(28) deems the amount to be received by the beneficiary. In these circumstances, the beneficiary may transfer the amount eligible under paragraph 60(j.1) to his RRSP and take a deduction.
We trust that these comments will be of assistance.
Yours truly,
Louise J. Roy, CGA
Manager
for acting Director
Ontario Corporate Tax Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch