While much has been written about the ability to split eligible pension income, some have wondered about splitting this income in the year of death. Specifically, in the year your client dies, can eligible income received before death be split? Does the month in which death occurs impact this amount? And are amounts deemed received as a consequence of death eligible to be split?
To answer these questions, consider the following hypothetical client scenario.
Bobby died in July at age 74. Prior to his death, for the period from January to July, Bobby received $14,000 in periodic pension payments and $7,000 in RRIF income. He also received $9,200 in combined OAS and CPP payments. At the time of death, Bobby’s assets included a RRIF valued at $300,000 (as per the RRIF contract, his spouse, Trina, was named beneficiary) and a principal residence jointly owned with his spouse.
In preparing Bobby’s terminal tax return, Bobby’s executor, his daughter Kelly, wonders if Bobby’s eligible pension income for the year of death could be split with Trina.
For the year of death, the federal Income Tax Act (ITA) permits the executor of a deceased pensioner to split eligible pension income received before death with a surviving spouse or common-law partner. Where this is the case (assuming no breakdown in the relationship prior to death), the amount eligible to be split is calculated the same as it is for years prior to death.
Bobby’s eligible pension income received before death totals $21,000 ($14,000 + $7,000). Of this amount, $10,500 can be reported as income by Trina (and deducted from Bobby’s income for the year), calculated as $21,000 × (7/7) × 50%. The 7/7 in the formula represents the number of months in the pensioner’s taxation year that the couple was married or lived in a common-law relationship (the numerator) divided by the number of months in the pensioner’s taxation year, which ends with the month of death (the denominator). Note that the tax rules consider you to have no spouse or common-law partner after death.
What about amounts deemed received at death? Recall that Bobby had a RRIF at the time of death valued at $300,000, with Trina named beneficiary on the plan contract.1 Under the ITA, RRSPs and RRIFs are deemed withdrawn just prior to death, meaning that, in the absence of a tax-deferred rollover to a qualifying survivor (see below), the amount deemed withdrawn at death is taxable for the year of death. Can any portion of this date-of-death amount be split between Bobby and Trina?
As per CRA technical interpretation #2012-0453151C6, because an amount deemed received at death is not “a payment out of a RRIF,” these amounts do not qualify as eligible pension income for purposes of the pension income-splitting rules. However, depending on the circumstances (i.e., who will receive the proceeds), there may be other ways to split this income.
Because Trina is a qualifying survivor (which includes a spouse, common-law partner or financially dependent child), Trina can request Bobby’s RRIF be transferred to her RRSP2 or RRIF on a rollover basis.
Alternatively, if the goal is to make use of graduated tax rates for both Bobby and Trina in the year of Bobby’s death, Trina can request a cash payment (all or part) from Bobby’s RRIF, which, as per CRA guidelines, would produce a T4RIF slip issued in Bobby’s name. This would allow for the date-of-death amount ($300,000) to be taxed on Bobby’s terminal tax return, with the option to transfer all or part of this amount to Trina to be taxed in her hands the year the payment is received.
The amount to transfer to Trina would be decided jointly by her and Kelly. Chart 2 of CRA guide RC4178 would be used to calculate and report the taxable amounts to both Bobby and Trina. A similar option is available for RRSPs and amounts received by qualifying survivors via the deceased’s estate. For more information on tax-deferred rollovers at death and when it might make sense to avoid them, see this previous column.
If the beneficiary of the RRIF is someone other than a qualifying survivor, there’s no opportunity to split the date-of-death amount; this amount wouldn’t qualify as eligible pension income, and the deemed withdrawal at death would be taxed to the deceased.
Pension income eligible for income splitting
Beginning in 2007, the federal government began allowing a taxpayer to split up to 50% of eligible pension income with a spouse or common-law partner. Many senior couples benefit from this strategy as they most commonly receive the income types listed in the table below.3
Table: Types of pension income eligible for income splitting, by pensioner’s age
|Where pensioner is any age4||Where pensioner is age 65 or older|
For more information on pension income splitting, see the CRA’s website.
1 In Quebec, with the exception of insurance products, named beneficiaries on RRSP and RRIF contracts are generally not allowed. Such designations are normally made in the deceased’s will.
2 If age 71 or younger.
3 List is not exhaustive.
4 Federal rules; for Quebec tax purposes, age 65 is required.
5 These can be split at any age if received due to death of a spouse, with the exception of Quebec where age 65 is required.