2016-0630781E5 104(13.3) and a CPP/QPP death benefit

Principal Issues: The requester asked for our confirmation of their assumptions regarding the application of 104(13.3): 1. the circumstances in which executors will be able to make a subsection 104(13.1) designation in 2016 and subsequent tax years will be limited to those situations in which the estate has no taxable income; and 2. the option to include the CPP/QPP death benefit on a T3 return will no longer be available.

Position: 1. We agree 2. Depending on the facts, the benefit will be taxed in the hands of the beneficiary or in the hands of the estate.

Reasons: 1. Wording of 104(13.3) 2. Question of fact to be determined considering all of the applicable circumstances including (where applicable) the terms of the will.

Author: deLang-Lenters, Saskia
Section: 56(1)(a.1), 104(1), 104(13.1), 104(13.3), 104(24)

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                                                                                                                                                   2016-063078
                                                                                                                                                   S. deLang-Lenters
July 25, 2016

Dear XXXXXXXXXX:

In your submission of February 1, 2016, you asked for our comments regarding the reporting of a Canada Pension Plan (“CPP”) or Quebec Pension Plan (“QPP”) death benefit in the 2016 and subsequent tax years as a result of the enactment of subsection 104(13.3) of the Income Tax Act. In particular, you asked for our confirmation of the following assumptions posited by you:

1.    the circumstances in which executors will be able to make a subsection 104(13.1) designation in 2016 and subsequent years will be limited to those situations in which the estate has no taxable income; and

2.    the option to include the CPP/QPP death benefit on a T3 return will no longer be available.

Our comments

All statutory references in this document are to the Income Tax Act, R.S.C. 1985, c. 1 (5th Suppl.) (the “Act”), as amended to the date hereof.

This technical interpretation provides general comments about the provisions of the Act. 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 IC70-6R7, Advance Income Tax Rulings and Technical Interpretations.

Subsection 104(13.3), applicable to the 2016 and subsequent tax years, provides that any designation made under subsection (13.1) or (13.2) by a trust in its return of income under Part I of the Act for a tax year is invalid if the trust’s taxable income for the year, determined without reference to subsection 104(13.3), is greater than nil.

As stated, in part, in the Department of Finance Explanatory Notes regarding subsection 104(13.3), “Subsection 104(13.3) is introduced to provide that a designation under subsection 104(13.1) or (13.2) is invalid if the trust’s taxable income (determined as though the designation were valid) for the year is greater than nil.”

Accordingly, we agree with your first assumption.

Regarding your second assumption, the option to include the CPP/QPP death benefit in income on a T3 return will no longer be available by making a designation under subsection 104(13.1) if the estate’s taxable income (determined as though the designation were valid) for the year is greater than nil.

The determination as to whether a CPP/QPP death benefit is to be taxed in the hands of the beneficiary or in the hands of the estate, in our view, is a question of fact to be determined considering all the applicable circumstances including (where applicable) the terms of the will.

For example, one consideration is the “executor’s year”. The following was stated, in part, in the 2011 STEP CRA Roundtable - Question 4 (our document 2011-0401851C6):

Paragraph 6 of Interpretation Bulletin IT-286R2, “Trusts - Amount Payable”, discusses the notion of the “executor year” under common law for a testamentary trust. It is stated in this paragraph that where the initial taxation year of a testamentary trust coincides with the executor year and where the sole reason for the rights of a beneficiary being unenforceable is the existence of an executor’s year, the CRA will consider the income of the trust for that year to be payable to the beneficiary or beneficiaries of the trust pursuant to subsection 104(24).

As stated in the T3 Trust Guide, “generally, you allocate income to the trust’s beneficiaries according to the terms of the will or trust document”.  The T3 Trust Guide further points out that an amount can only be allocated to a beneficiary if one of the following applies:

o     the beneficiary is entitled to the income in the year that it is earned by the trust, under the trust document;
o     the trust makes a preferred beneficiary election to include the trust income in the beneficiary’s income; or
o     the beneficiary is paid income in the year that is earned by the trust, at the discretion of the trustee.

As noted in document 2007-0259841E5, “pursuant to subsection 104(6), there may be deducted in computing the income of an estate or trust for a taxation year, such amount as the estate or trust claims that would be its income for the year as became payable in the year to a beneficiary. Subsection 104(24) provides that, for the purposes of subsection 104(6), an amount is deemed not to have become payable to a beneficiary in the year for the purposes of subsection 104(6) unless the amount was actually paid to the beneficiary in the year, or the beneficiary was entitled in the year to enforce payment of it.”

To the extent that a CPP/QPP benefit is payable to a beneficiary of the estate in the tax year that it was received by the estate, the amount so payable would be included in the beneficiary’s income under subsection 104(13) and would be deductible by the estate under subsection 104(6). However, where the amount was not payable to a beneficiary of the estate in the tax year that it was received by the estate, it would be taxable in the hands of the estate.

We trust our comments will be of assistance to you.

Yours truly,

Phil Kohnen
Manager, Trust Section I
Financial Industries and Trusts Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch

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