This fact scenario is based on a situation presented to me recently and I appreciated the opportunity to being “re-educated” on the tax treatment of pension plan lump sum payments.
A taxpayer’s spouse retires as a teacher and elects to start receiving her guaranteed pension. A couple of years later, the spouse passes away from cancer and the taxpayer being the beneficiary of his spouse’s pension plan elects to receive the pension monthly instead of a lump sum. The taxpayer passes away unexpectedly three years later. Approximately a year later, thanks to a tip from the deceased taxpayer’s sister, the taxpayer’s beneficiaries became aware of the fact that the deceased taxpayer had not fully collected on the guaranteed pension, left by his spouse and the taxpayer’s beneficiaries received a payout on the pension shortly thereafter.
The estate claimed the proceeds of the lump sum payout on the taxpayer’s terminal return, with the expectation of applying a capital loss co-incidentally created on the deemed disposition of property owned by the taxpayer to offset the income from the payout. The Canada Revenue Agency (“CRA”) denied the Estate’s filing position on the payout.
The beneficiaries thought it was because there was some delay between the taxpayer’s date of death and ultimate payout. I didn’t think it could go on the terminal return but it could form part of a rights and things return, separate from the terminal return. Regrettably, I was reminded of CRA’s position on lump-sum payouts under this scenario.
Sometime ago, the CRA was asked for its view on the treatment of a pension which had been designated to a non-spousal beneficiary outside of the will of the deceased pensioner, a similar fact scenario to the above. In particular, the CRA was asked whether a lump sum payment from the pension was a “right or thing” for purposes of the Income Tax Act (the “Act”). The Act provides that a separate return may be filed for rights or things held at the time of a taxpayer’s death. The advantage to filing a “rights and things” return is that low marginal rates and various personal credits can effectively be claimed twice, so as to reduce the overall tax burden of the deceased.
The CRA noted that it will not normally object to a lump-sum payment out of a pension plan that is paid to a beneficiary being reported on the terminal return of the deceased in accordance with the Act as a right or thing where the pensioner died prior to being entitled to receive retirement benefits under the pension. So the CRA did not consider the above facts to be analogous as the pensioner had begun to receive payments under the pension. In this scenario, the “right or thing” associated with the final payout was not the deceased taxpayer’s, it belonged to the beneficiaries,
In the CRA’s view, the lump-sum payment would not be a right or thing for purposes of the Act and would instead be taxable to the beneficiary (ies) pursuant to the Act.