2020-0867081I7 Pension Benefit Received by Estate

Principal Issues: A lump sum amount is paid by a pension plan to the estate of a deceased pensioner after the graduated rate estate status (GRE) has expired. Can the CRA use its discretion to extend the GRE status of the estate?

Position: No. Pursuant to subparagraph 56(1)(a)(i) the lump sum will be included in the income of the estate in the taxation year in which it was received. Where the estate pays or the pension benefit is payable to the beneficiary in the same taxation year of the estate, the estate may claim a deduction under subsection 104(6) and the beneficiary is required to include the amount in their income pursuant to subsection 104(13).

Reasons: Wording of the Act.

Author: Dannehl, Dawn
Section: Paragraph 56(1)(a) and subsections 104(6), 104(13) and 104(24) of the ITA.

                                                                                                 June 15, 2021

Shara Erysthee-Elisee                                                             Dawn Dannehl
Senior Programs Officer
Legislation Section Stakeholder Relations Division (SRD)    
Individual Returns Directorate (IRD)    
Assessment, Benefit Service Branch (ABSB)
                                                                                                2020-086708

Veteran's pension lump sum received after death

We are writing in response to your email of October 15, 2020, wherein you inquired about the Minister’s ability to extend the 36-month period for a graduated rate estate as defined in subsection 248(1) of the Income Tax Act (the “Act”).

Our understanding of the relevant facts are as follows:

* XXXXXXXXXX (the “Deceased”) passed away early in XXXXXXXXXX.

* The Deceased was retired from the XXXXXXXXXX.

* The Deceased did not have a surviving spouse or children and his sister was the sole beneficiary of his estate (the “Estate”).

* In XXXXXXXXXX, the Office of the Public Trustee of XXXXXXXXXX (“Trustee”) finalized the Estate, received a clearance certificate from the CRA, and closed their file.

* The 36-month graduated rate estate (“GRE”) period expired in early XXXXXXXXXX.

* In XXXXXXXXXX, the sole beneficiary of the Estate notified the Trustee that additional pension funds were available to the Estate.

* In XXXXXXXXXX, the Trustee was contacted by the Government of Canada Pension Centre (“Pension Centre”) regarding a payment that was owed to the Estate.    

* On XXXXXXXXXX, (the last day of the Estate’s XXXXXXXXXX taxation year), the Trustee received a lump-sum payment from the Pension Centre in the amount of $XXXXXXXXXX. We understand that the amount was not paid to the beneficiary during the taxation year that it was received by the Estate.

* The lump-sum payment was in respect of the Deceased’s XXXXXXXXXX pension and represented the value of an outstanding minimum pension payment of $XXXXXXXXXX less withholding tax of $XXXXXXXXXX. The Pension Centre paid the net amount to the Estate and provided a T4A for the XXXXXXXXXX taxation year in respect of the gross amount and the income tax deducted at source.

* Trustee re-opened the Estate and the gross amount of the lump sum benefit was reported by the Estate on a T3 Trust Income Tax and Information Return for the taxation year ending on XXXXXXXXXX. The Trustee has noted that since the Estate no longer qualified as a GRE, the lump sum benefit was taxed at the highest the marginal tax rate applicable to individuals.

* Upon filing the T3 return, the Trustee requested that the GRE period be extended to include the year in which the pension amount was received.

Our Comments

Generally speaking, a GRE of an individual at any time is defined by subsection 248(1) as an estate that arose on and as a consequence of the death of the individual if:

i) that time is no more than 36 months after the death of the individual;

ii) the estate is a testamentary trust; and

iii) the estate is the only estate to designate itself as the GRE of the individual.

The GRE definition does not provide the Minister of National Revenue with the ability to extend the 36-month period, nor can the authority for such an extension be found elsewhere in the Act. As a result, we considered whether the lump-sum payment could be reported in a prior taxation year of the Estate.

Superannuation or pension benefits are included in the income of a taxpayer pursuant to subparagraph 56(1)(a)(i), which provides that any amount received by the taxpayer in the year as, on account or in lieu of payment of, or in satisfaction of any of the benefits articulated in paragraph 56(1)(a) shall be included in income of a taxpayer for that taxation year. As the lump-sum payment was received in XXXXXXXXXX, it must be reported in the Estate’s taxation year ending on XXXXXXXXXX.

You also asked whether subsection 152(4.2) of the Act would have application in this situation. Subsection 152(4.2) allows a determination at any time after the normal reassessment period of a taxpayer if:

i) the taxpayer is an individual (other than a trust) or a GRE;

ii) the reassessment results in a refund or a reduction of the taxpayer’s amount payable under Part I for the year; and

iii) the taxpayer makes an application for the determination on or before the day that is 10 calendar years after the end of that taxation year.

When all of these conditions are satisfied, the Minister may reassess tax, interest or penalties payable in respect of that year.

In our view, subsection 152(4.2) cannot be used to include the lump-sum payment in a year other than the year in which it was received for two reasons. Firstly, subparagraph 56(1)(a)(i) requires that the amount be included in income in the year in which it was received. Secondly, such an inclusion would not result in a refund or a reduction of an amount payable under Part I for the year.

However, we note that where the income of a trust for a taxation year becomes payable to a beneficiary in the same year, generally the trust may claim a deduction pursuant to subsection 104(6) of the Act in respect of the amount payable, and the amount is included in the income of the beneficiary pursuant to subsection 104(13) of the Act.  

Subsections 104(6) and 104(13) must be considered in conjunction with subsection 104(24) of the Act, which provides that an amount is deemed not to have become payable to a beneficiary in a taxation year unless it was paid in the year to the beneficiary or the beneficiary was entitled in the year to enforce payment of the amount. As noted above, no amount of the gross lump sum pension benefit was paid to the beneficiary in the year. Therefore, for an amount of the Estate’s income to be payable to the beneficiary for the purposes of subsections 104(6) and 104(13), the beneficiary would have to be entitled to enforce payment of that amount in the Estate’s taxation year ending on XXXXXXXXXX.   Whether or not the amount was payable to the beneficiary, and the beneficiary was, on the last day of the Estate’s taxation year, entitled to enforce payment of the income received by the Estate on that same day is a question of law and fact which only the Trustee can determine.

If, based on all the facts and surrounding circumstances, the Trustee determines that the beneficiary was, on XXXXXXXXXX, entitled to enforce payment of the lump-sum amount received by the Estate, the beneficiary is required to include the gross amount of the lump sum benefit in their income for their 2019 T1 Income Tax and Benefit Return (T1 Return) pursuant to subsection 104(13). The Trustee must issue a T3 Statement of Trust Income Allocations and Designations to the beneficiary for that amount and the T3 Trust Income Tax and Information Return may be amended to claim a deduction for the amount that became payable to the beneficiary. We note that when the conditions in subsection 104(27) of the Act are met, the character of certain pension benefits received by a GRE can flow through to a beneficiary of the estate. As the Estate was not a GRE in the year in which it received the pension benefit, the Estate cannot designate an amount pursuant to subsection 104(27). Therefore, the pension benefit will be deemed to be income of the beneficiary for the year from a property that is an interest in the Estate and not from any other source pursuant to subsection 108(5) of the Act.

It would advisable for the beneficiary to seek professional advice to gain a full understanding of the implications of filing an amended T1 Return for the XXXXXXXXXX taxation year.

Unless exempted, a copy of this memorandum will be severed using the Access to Information Act criteria and placed in the Canada Revenue Agency’s electronic library. After a 90-day waiting period, a severed copy will also be distributed to the commercial tax publishers for inclusion in their databases. You may request an extension of this 90- day period. The severing process removes all content that is not subject to disclosure, including information that could reveal the identity of the taxpayer. The taxpayer may ask for a version that has been severed using the Privacy Act criteria, which does not remove taxpayer identity. You can request this by e-mailing us at: ITRACCESSG@cra-arc.gc.ca. A copy will be sent to you for delivery to the taxpayer.

We trust these comments are of assistance to you,

Steve Fron, CPA, CA, TEP
Manager, Trust Section II
Financial Industries and Trusts Division
Income Tax Rulings Directorate

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