Whether a CPP/QPP death benefit is to be taxed in the hands of the beneficiary or in the hands of the estate is determined by the terms of the will.
One consideration is the “executor’s year where the CRA has stated:
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:
• the beneficiary is entitled to the income in the year that it is earned by the trust, under the trust document;
• the trust makes a preferred beneficiary election to include the trust income in the beneficiary’s income; or
• the beneficiary is paid income in the year that is earned by the trust, at the discretion of the trustee.
Generally speaking, 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.
