The Canada Revenue Agency (CRA) was asked whether certain settlement payments are taxable in the hands of the deceased taxpayer where a taxpayer dies prior to obtaining a determinable right to the payments.
A class action lawsuit was brought forth on behalf of former members of the Canadian Forces. A 2013 Court Order outlined the terms of the settlement of the class action lawsuit, with the exception of one outstanding item that was dealt with in a subsequent court order issued in 2014. The Court Order provided that in respect of Class Members who are deceased, the Settlement Amounts payable to the date of death will be paid to the Class Member’s surviving spouse. Where the deceased Class Member does not have a surviving spouse, the payments will be paid to the Class Member’s dependent children. Where the deceased Class Member does not have a surviving spouse or dependent children, no amount will be paid in respect of that Class Member. In some situations, payments were made to the estate of a deceased Class Member as opposed to being made directly to a surviving spouse or dependent.
The CRA took the view that a determinable right to the Settlement Amounts was obtained by Class Members on the date of issuance of the 2013 Court Order. It is also their view that the Settlement Amounts will not be taxable in the hands of any Class Member who died prior to the time at which the Settlement Amounts became determinable. The CRA considered the application of subsections 70(1) and (2) of the Income Tax Act (ITA) since these are the only provisions that could possibly result in the Settlement Amounts being included in a deceased person’s income.
In general terms, ITA 70(1) deems amounts which were payable periodically but not paid before an employee’s death to have accrued in equal daily amounts, and the amount so deemed to accrue to the time of death is included in the deceased person’s income. ITA 70(1) does not apply to the Settlement Amounts since, at the time of death, these amounts were not payable. As for ITA 70(2), in general terms it concerns rights or things, other than amounts described in subsection 70(1), that are of an income nature and that have not been realized at the date of death. ITA 70(2) does not apply to the Settlement Amounts since a Class Member who died prior to obtaining a determinable right to the Settlement Amounts would not have had a right or thing at the time of death as contemplated by subsection 70(2).
I will follow up with some words on who paid the tax in my next blog.