Principal Issues: An individual died in 2021. A pay equity settlement has been reached before the death. More than a year after the death and more than 90 days after the notice of assessment for the year of death was sent, the estate receives the retroactive equity adjustment amount. 1) Should the liquidator include the amount of the payment in the final tax return for the year of individual's death? 2) Could the liquidator have declared an estimate of the pay equity payment to file on time the rights or things tax return and possibly amend that return later?
Position: 1) Yes if the right existed at the time of the death. 2) Possibly.
Reasons: 1) Long standing position. 2) Yes if the right is determinable.
FINANCIAL STRATEGIES AND FINANCIAL INSTRUMENTS ROUNDTABLE, 10 OCTOBER 2024
2024 APFF CONFERENCE
5. Pay equity payment received after the deadline for filing a rights or things return
A retroactive payment from employment for which the right was established before death represents a right or property that may be the subject of a separate income tax return for the year of death pursuant to subsection 70(2) of the Income Tax Act (footnote 1).
Such a separate return must be filed not later than the later of the day that is one year after the date of death of the taxpayer and the day that is 90 days after the sending of any notice of assessment in respect of the tax of the taxpayer for the year of death.
Consider the following situation:
An individual died on October 5, 2021, after the June 2021 pay equity settlement with the Quebec government. In the spring of 2022, the deceased's final income tax and benefit return (“Final T1 Return”) for the 2021 taxation year was filed, along with a trust information and income tax return (footnote 2)for the estate. No rights or things return (“Rights or Things Return”) under subsection 70(2) was filed for the year of death.
At the end of 2022, more than one year after the date of death of the taxpayer and the day that is 90 days after the sending of any notice of assessment in respect of the tax of the taxpayer for the year of death, a pay equity amount was received by the estate. At the beginning of 2023, the executor of the estate received a T4 slip (footnote 3) for the adjustment under the pay equity agreement, as well as a T5 slip (footnote 4) for interest on that amount. The slips were dated 2022.
While it is obvious that the interest was taxable to the estate, the tax treatment of the salary adjustment received in 2022 when the death occurred in 2021 may lead to confusion.
Questions to the CRA
(a) In the situation presented, given the delays in filing a Rights or Things Return under subsection 70(2), can the CRA confirm that the only possible option for the executor is to include the salary adjustment in the deceased's T1 Final Return for the year of death (2021), even if the income is received in a subsequent year (2022)? The executor would therefore have to amend the deceased's T1 Final Return for the 2021 taxation year to include an amount received in 2022.
(b) To avoid losing the option of filing a Rights or Things Return under subsection 70(2), would it have been possible to file such a return by including an estimated amount of salary adjustment as rights or things (provided, of course, that the deceased was entitled to receive such an amount at that time)? If so, would it have been possible to amend the Rights or Things Return filed under subsection 70(2) to adjust the amount reported to reflect the actual amount received?
CRA Response
General Comments
Generally, salary, wages, taxable benefits and other amounts owing to an employee by the employer for work performed up to the date of the employee's death are considered to be periodic payments of remuneration that must be included in computing the employee's income for the year of death pursuant to subsection 70(1).
Furthermore, subsection 70(2) provides that if a taxpayer who has died had at the time of death rights or things (other than any capital property or any amount included in computing the taxpayer’s income by virtue of subsection 70(1) and 70(3.1)), the amount of which when realized or disposed of would have been included in computing the taxpayer’s income, the value of the rights or things at the time of death shall be included in computing the taxpayer’s income for the taxation year in which the taxpayer died.
Generally, for a right to receive an amount to be considered a right or thing of an individual within the meaning of subsection 70(2), the individual must be legally entitled to it at the time of death and the value of the right must be determinable at that time. It is not necessary, however, for the amount to be payable at the time of death, for example, because it would be subject to a term.
The existence and value of a right or thing of a taxpayer under subsection 70(2) depends on the facts and circumstances existing at the time of the taxpayer's death. Whether an amount constitutes a right or thing for a taxation year can only be determined by taking into account all the relevant facts and documents pertaining to a given situation.
We consider that retroactive payroll adjustments, where a collective agreement or other authorizing document was signed prior to the date of the taxpayer's death, generally constitute rights or things referred to in subsection 70(2). In such a case, the amount of the adjustments is taxable in the year of the taxpayer's death and not in a subsequent year in which the amount is actually paid. This is the case even though the employer is required to issue the taxpayer a T4 slip for the year in which the amount is paid.
By virtue of subsection 70(2), the taxpayer's legal representative may elect to file a separate income tax return including the value of the deceased's rights or things and pay the corresponding tax for the taxation year in which the taxpayer died, as if there were another person. However, the election to file such a separate return must be made not later than the later of the day that is one year after the date of death of the taxpayer and the day that is 90 days after the sending of any notice of assessment in respect of the tax of the taxpayer for the year of death.
CRA Response to Question 5(a)
In this case, the time limits for making the election provided for in subsection 70(2) have expired and it is no longer possible for the executor to file a separate Rights or Things Return. The executor should therefore file an amended T1 Final Return to include the amount of the salary adjustment to the extent that the taxpayer's entitlement to the salary adjustment existed and was determinable at the time of death.
CRA Response to Question 5(b)
Where it is not possible, for example because of administrative delays, to obtain from the employer the precise amount of the pay equity adjustment payment within the time required to make the election under subsection 70(2) and to file a Rights or Things Return, the CRA will generally accept the filing of such a declaration where the taxpayer declares an amount estimated on the basis of the best information available at the time the declaration is filed. Once the value of the rights or things referred to in subsection 70(2) has been determined with greater certainty, the representative must, if necessary, amend the return.
Michel Ostiguy
10 October 2024
2024-102329
FOOTNOTES
Due to the requirements of our systems, the footnotes contained in the original document are reproduced below:
1 R.S.C. 1985, c. 1 (5th Supp.) (the “Act”).
2 CANADA REVENUE AGENCY, T3 RET Return “Trust Income Tax and Information Return”.
3 CANADA REVENUE AGENCY, T4 Slip “T4 Statement of Remuneration Paid (Slip)”.
4 CANADA REVENUE AGENCY, T5 slip “Statement of Investment Income”.