2014-0525681E5 Taxation of inherited pension plan payment

Principal Issues: Is a pension payment received by a resident of Canada from XXXXXXXXXX taxable in Canada and, if so, does it qualify for the $10,000 “death benefit” exemption?

Position: A pension benefit does not qualify for the $10,000 death benefit exemption. It is included in income under subparagraph 56(1)(a)(i) and is taxable in Canada subject to tax treaty relief.

Reasons: A pension benefit is not a “death benefit”.

Author: Storr, Keely
Section: 56(1)(a), 110(1)(f)(i), 248(1) "superannuation or pension benefit", 248(1)"death benefit", Article XVIII and Article XXIV of the Canada – U.S. Tax Treaty

XXXXXXXXXX    

                                                      2014-052568
                                                      Keely Storr

February 22, 2016

Dear XXXXXXXXXX:

Re:   Inherited pension plan payment from XXXXXXXXXX public pension plan

This is in response to your letter in which you asked whether a pension payment received from XXXXXXXXXX public pension plan (the “Plan”) by a Canadian resident taxpayer and citizen of the United States (“U.S.”) would qualify for the $10,000 “death benefit” exemption or would otherwise be taxable in Canada. We apologize for the delay in responding to you.

You presented a hypothetical scenario whereby the distribution was made to the taxpayer as a designated beneficiary of the decedent in accordance with the terms of the Plan. The decedent was a U.S. resident and a retired member of the Plan at the time of his death. The taxpayer reported the distribution from the Plan on his U.S. personal tax return and paid U.S. federal and state income taxes on this income, as required by the U.S. federal and state tax law.

This technical interpretation provides general comments about the provisions of the Income Tax Act (the “Act”) and related legislation (where referenced).  It does not confirm the income tax treatment of a particular situation involving a specific taxpayer but is intended to assist you in making that determination.  The income tax treatment of particular transactions proposed by a specific taxpayer will only be confirmed by this Directorate in the context of an advance income tax ruling request submitted in the manner set out in Information Circular IC 70-6R6, Advance Income Tax Rulings and Technical Interpretations however, we offer the following general comments, which may be of assistance to you.

Unless otherwise stated, references in this letter to a subsection or subparagraph refer to the provisions of the Act.

Our Comments

A “death benefit” is defined in subsection 248(1) as the total of all amounts received 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. The gross amount of the death benefit is reduced by the first $10,000 of the benefit received and is included in the income of the recipient under subparagraph 56(1)(a)(iii). However, an amount received by a taxpayer out of or under a pension or superannuation fund or plan is considered to be a “superannuation or pension benefit”. A “superannuation or pension benefit” is included in income under subparagraph 56(1)(a)(i) and does not qualify for the $10,000 “death benefit” exclusion.

The term “superannuation or pension benefit” is defined in subsection 248(1) to include any amount received out of or under a superannuation or pension fund or plan and any payment made to a beneficiary under such fund or plan in accordance with the terms of the fund or plan, or resulting from the amendment to or termination of the plan or fund.

The determination of whether a plan is a superannuation or pension plan is a question of fact.  We have not previously considered whether XXXXXXXXXX qualifies as a pension plan for Canadian tax purposes. However, we can offer the following general comments.

Generally, a plan will be considered to be a superannuation or pension plan where contributions have been made to the plan by or on behalf of an employer or former employer of an employee in consideration for services rendered by the employee and the contributions are to be used to provide an annuity or other periodic payment on or after the employee's retirement. Provided these conditions were met in respect of the Plan, it would be considered a pension plan for Canadian tax purposes and the payment received by the beneficiary of the decedent in accordance with terms of the Plan would constitute a pension benefit. The amount of the pension benefit received would be included in income of the Canadian resident taxpayer pursuant to subparagraph 56(1)(a)(i) in the year of receipt, subject to relief available under the Canada-U.S. Tax Treaty (the “Treaty”).

Pursuant to paragraph 1 of Article XVIII of the Treaty, the amount of the pension taxable in Canada is reduced by the amount that would be excluded from taxable income in the U.S. if the recipient were a resident thereof. To the extent that the amount received by the beneficiary of the decedent would be excluded from taxable income in the U.S. had the recipient been a resident thereof, for example as a consequence of the deduction allowed under section 691(c)(1) of the U.S. Internal Revenue Code (footnote 1), such excluded amount would not be taxable in Canada and may be deducted by the Canadian resident taxpayer in computing his taxable income in accordance with subparagraph 110(1)(f)(i).

A foreign tax credit may be available in Canada in respect of income or profit tax paid on the pension benefit to the government of the U.S. or a political subdivision.  The foreign tax credit would be computed in accordance with the provisions of Article XXIV of the Treaty and the Canadian domestic rules in subsection 126(1).  As the taxpayer is a U.S. citizen, the credit in respect of the U.S. federal and state taxes should be computed in accordance with the rules of subparagraph 4(a) of XXIV of the Treaty.  Any portion of U.S. federal and state tax paid that is refundable to the taxpayer as a result of the provisions of subparagraph (4)(b) of Article XXIV is not creditable under subsection 126(1).

We trust these comments are of assistance.

Section Manager
for Division Director
International Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch

FOOTNOTES

Note to reader:  Because of our system requirements, the footnotes contained in the original document are shown below instead:

1  Section 691(c)(1) provides that a person who includes an amount of income in respect of a decedent (“IRD”) in gross income under § 691(a) is allowed as a deduction, for the same taxable year, a portion of the estate tax paid by reason of the inclusion of that IRD in the decedent’s gross estate.

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