2017-0709461E5 Receipt of Retroactive CPP Lump Sum after death

Principal Issues: Tax treatment of CPP Lump Sum Payment correcting previous error received after death.

Position: Most likely a rights or thing - as taxpayer had a clear right to payments before death.

Reasons: Opinion given in line with previous technical interpretations.

Author: Holloway, Lena
Section: 70(2)

XXXXXXXXXX                                                                                                                 Lena Holloway, CPA, CA
                                                                                                                                         2017-070946
June 28, 2017

Dear XXXXXXXXXX:

Re:  Retroactive CPP Lump Sum Payment Amount

This is in reply to your correspondence of June 11, 2017, requesting our views on the income tax treatment of a retroactive lump sum Canada Pension Plan (“CPP”) payment received by your deceased mother’s estate.

Your letter explained that your mother died on XXXXXXXXXX and upon applying for the CPP death benefit, her entitlement to past CPP benefits was reviewed at that time.  As a result of this review, the estate received, in XXXXXXXXXX, a CPP lump sum retroactive payment that corrected her entitlement back to XXXXXXXXXX. The payment of $XXXXXXXXXX represented 25 cumulative years of CPP payments that your mother was entitled to, but in error, did not receive.

You were told that Service Canada would not be issuing a T4A(P) in respect of the payment until February of 2018.  You would prefer to settle your mother’s estate as soon as possible and not have to file a trust return for this retroactive amount in the spring of 2018.  As such your letter requested guidance on how to deal with this amount for tax purposes.

Our comments

The comments which follow in this letter will provide general comments about the provisions of the Income Tax Act (Canada), R.S.C. 1985 (5th Supp.) c.1, as amended to the date hereof (the “Act”).  Our comments do not confirm the income tax treatment of a particular situation, but are intended to assist you in making that determination.  The income tax treatment of transactions 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 (see http://www.cra-arc.gc.ca/E/pub/tp/ic70-6r7/README.html).

Subsection 70(2) of the Act addresses the taxation of “rights or things” that a taxpayer owns on death and that would have been included in income if the taxpayer had survived to realize or dispose of these properties.  Rights or things are amounts that have been earned but not included in income.  Some examples of rights or things include declared but unpaid dividends, declared but unpaid bonuses, and uncashed matured bond coupons.

Subsection 70(2) permits the taxpayer’s legal representative to elect to file a separate return for the value of the rights or things such that tax will be levied on that income as though the deceased were another person. Certain personal credits such as the basic personal amount, the spouse or common-law partner amount, and the age amount can be claimed on both the final return and this separate return, where the deceased was entitled to claim such credits.

To be valid, an election to file a separate return must be made no later than the later of one year after the date of death, and 90 days after the mailing of any notice of assessment or reassessment for the year of death.

Where a CPP lump sum payment is received after the death of a taxpayer and is being made by the CPP administrators in order to correct underpayments in respect of prior years, the taxpayer would have had a clear right at the time of death to that payment.  In our view, this proprietary interest in the lump sum payment would qualify as “rights or things” and therefore could be reported by the executor of the estate on a separate subsection 70(2) return.

If the subsection 70(2) election to file a separate “rights or things” return is not made (ie. where the required deadline has passed), the CPP lump sum payment received after the date of death would have to be reported by the executor on a T3 return. For more details on how to file a rights or things return please refer to the discussion found on our website as follows: http://www.cra-arc.gc.ca/tx/ndvdls/lf-vnts/dth/ptnl/rghts-eng.html.

The above comments represent our view of the law as it generally applies. While we hope that our comments are of assistance to you, please note that this is not an advance income tax ruling and, accordingly, is not binding on the Canada Revenue Agency.

Yours truly,

Phillip Kohnen
for Division Director
Financial Industries and Trusts Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch

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