Principal Issues: If someone other than the estate of the deceased receives a CPP (or QPP) death benefit, is it taxable under paragraph 56(1)(a.1)?
Position: Yes, if the recipient is a person described in subsection 104(1).
Reasons: Subsection 104(1) includes in the meaning of estate, the heir, executor and certain others, having ownership or control of the property of the estate.
April 12, 2005
HEADQUARTERS HEADQUARTERS Ms. Loretta Kucic Terry Young, CA Manager, Individual Programs Section 952-1506 Programs Division Client Services Directorate 2004-009738
Canada Pension Plan ("CPP") Death Benefit
We are writing in response to your memorandum of September 24, 2004, concerning the taxation of the above-mentioned benefit.
Background
Paragraph 56(1)(a) of the Income Tax Act (the "Act") includes in a taxpayer's income benefits received under the CPP (or a provincial pension plan as defined in section 3 of the CPP). However, clause 56(1)(a)(i)(F) excludes a death benefit, hereafter referred to as a CPP Death Benefit, paid under section 71 of the CPP Act (or a provincial pension plan as defined in section 3 of the CPP).
A CPP Death Benefit received by an estate is included in income by virtue of paragraph 56(1)(a.1) of the Act, which states:
where the taxpayer is an estate that arose on or as a consequence of the death of an individual, each benefit received under section 71 of the Canada Pension Plan, or under a similar provision of a provincial pension plan as defined in section 3 of that Act, after July 1997 and in the year in respect of the death of the individual; (emphasis added)
Paragraph 56(1)(a.1) of the Act is the only provision that includes the CPP Death Benefit in income. In situations where the CPP Death Benefit is paid to a person, other than the estate of the deceased, you asked us if paragraph 56(1)(a.1) requires that the benefit be included in the income of the estate or if it would be non-taxable.
You also asked us the following questions:
1. If an individual passes away and has no assets and a family member applies for the CPP Death benefit, is the amount non-taxable if it is paid to the family member?
2. Does it make any difference if the person who applies for the benefit is the spouse or common-law partner (i.e., no estate because everything was owned jointly)? Would the amount be non-taxable?
Our Comments
Subsection 104(1) of the Act states, in part:
Reference to trust or estate - In this Act, a reference to a trust or estate (in this subdivision referred to as a "trust") shall, unless the context otherwise requires, be read to include a reference to the trustee, executor, administrator, liquidator of a succession, heir or other legal representative having ownership or control of the trust property, ...
In situations where an heir or other person not dealing at arm's length with the estate applies for the death benefit, we will generally consider the death benefit to have been received either at the direction or acquiescence of the estate. The recipient will thus be a person described in subsection 104(1) of the Act "having ownership or control of the trust property". Consequently, the death benefit will be included in the recipient's income pursuant to paragraph 56(1)(a.1) of the Act.
Conversely, the receipt of a CPP Death Benefit generally will not be taxable where the recipient deals at arm's length with the estate and the benefit is received in the following circumstances:
(a) The amount is received by a taxpayer who paid the deceased's funeral expenses;
(b) The amount does not exceed the actual funeral expenses;
(c) The deceased has no heirs and there is no other property in the estate.
With respect to your specific questions:
1. If the CPP Death Benefit were paid to a family member, the benefit generally would be taxable in that person's hands unless the recipient and the estate deal with each other at arm's length and the conditions listed above are satisfied. For information on the meaning of arm's length, please refer to interpretation bulletin IT-419R2, Meaning of Arm's Length.
2. In situations where there is no other property in the estate because all the deceased's property was held jointly with the deceased's spouse or common-law partner, the CPP Death Benefit paid to the deceased's spouse or common-law partner will be taxable in the recipient's hands pursuant to paragraph 56(1)(a.1) of the Act on the basis that the recipient is a person described in subsection 104(1) of the Act.
We trust our comments are of assistance.
John Oulton, CA
for Director
Business and Partnerships Division
Income Tax Rulings Directorate
Policy and Planning Branch