ARCHIVED CD 2007-015

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| Appendix A

August 22, 2007 (Revised August 5, 2008)

SUBJECT: Payment of Entitlements After an Employee's Death

1. PURPOSE

1.1 The purpose of this directive is to provide clients with updated information concerning the requirements for statutory deductions at source, exemptions and applicable income tax forms to be utilized for the payment of entitlements after an employee's death.

2. BACKGROUND

2.1 Upon the death of an employee, the benefits which had accrued or were otherwise payable by virtue of his employment may be liable to statutory deductions at source.

3. CANCELLATION

3.1 This directive cancels Services Pay Directive 1989-089 (33) dated June 14, 1989.

4. PROCEDURES/INSTRUCTIONS

4.1 The table in Appendix A has been prepared to assist clients and pay offices in determining the statutory deductions and reporting requirements.

4.2 The amounts payable as a result of an employee's death fall into three groups for taxation purposes.

Group A: Amounts Included in the Deceased's Income - T4/Relevé 1

These amounts include:

1. salary or wages (including overtime) accrued from the end of the last pay period to the date of death inclusive. This includes any allowances that form part of compensation for the duties of the position;
2. eligible entitlements for which the 10-day rule applies, such as the bilingual bonus, from the end of the last pay period to the end of the month;
3. payments for accrued annual and furlough leave or payment of vacation pay;
4. adjustments to accrued annual and furlough leave where the collective agreement or other authorizing instrument was signed prior to the date of death;
5. salary or wages (including overtime) for a pay period that was completed prior to the date of death and paid after the date of death. This situation will primarily occur for employees who are paid in arrears;
6. adjustments to salary or wages applicable to the period prior to and including the date of death, where the collective agreement or other authorizing instrument was signed prior to the date of death;
7. adjustments to salary or wages (including overtime) as a result of a promotion which was authorized prior to the date of death; and
8. payment of the employee's share of the employment insurance employer premium reduction, (this only applies to certain employers).

These payments form part of the employee's remuneration for the taxation year in which the employee died, regardless of when they are paid. They are subject to the normal statutory deductions at source (income tax, Canada Pension Plan, Quebec Pension Plan, employment insurance, Quebec Parental Insurance Plan) and must be included as income on the T4/Relevé 1 issued in the deceased's name.

The amounts payable under c), d), e), f), g) and h) above, while included in the deceased's income, may be subject to provisions of the following:

• Elective Income - Rights or Things under the Income Tax Act (Subsection 70(2)). Please refer to the Canada Revenue Agency (CRA) document IT-212R3SR, "Income of Deceased Persons - Rights or Things" at the following Web site: Income Tax Interpretation Bulletin
• Rights and Property of the person at the time of death (section 429 of the Taxation Act). Please refer to the ministère du Revenu du Québec (MRQ) document "Guide to Filing the Income Tax Return of a Deceased Person" at the following Web site: in-117-v(2006-10)

A remark must be added by the pay office to highlight the fact that an election may, within the time limits prescribed therein, be made under the above-noted section. The remark should be reflected on the T4/Relevé 1 as follows:

• "Subsection 70 (2) of the Income Tax Act Availability"
• "Section 429 of the Taxation Act "

Amounts included in the deceased's income (Group A) must be reflected on the T4/Relevé 1 issued for the year of death. Where the payment is made in the year subsequent to the year of death, the original T4/Relevé 1 must be amended to reflect all earnings for the year of death.

Group B: Amounts Included in the Estate's or Survivor's Income - T4A/Relevé 1 and 2

These amounts include:

1. salary or wages (including adjustments) paid for the period from the day after the date of death to the end of the month;
2. payment of severance pay;
3. retroactive adjustments to severance pay where the collective agreement or other authorizing instrument was signed prior to the date of death;
4. return of contributions (ROC), retirement compensation arrangement (RCA) or transfer value (TV).

Income tax must be deducted at source at the rate prescribed for lump sum payments as described in Compensation Directive 2006-002.

Amounts included in the estate's or survivor's income (Group B), should be reflected on the T4A/Relevé 1 issued for the year in which the payments are made. However, a T4A/Relevé 2 should be produced for an ROC.

Please note that the T4A/Relevé 1 and 2 forms issued for payments of amounts under Group B should not be amended where payments are made in a year subsequent to the year of death.

When certain payments, that are considered death benefit payments, as outlined in Appendix A, are made directly to the estate or the person entitled by law to share in the estate, payment up to a total cumulative amount of $10,000 is tax free. That is to say, payments made to the person entitled by law to share in the estate or estate in preceding taxation years must be taken into consideration to ensure that the cumulative total of $10,000 is not exceeded. An example follows:

Year	Payment	Non-taxable	Taxable
2005	$5,000	$5,000	$0
2006	$3,000	$3,000	$0
2007	$4,000	$2,000	$2,000
TOTAL	$12,000	$10,000	$2,000

Group C: Non-taxable Amounts

The following are non-taxable payments which are not considered earnings and are not reported on T4/Relevé 1 or T4A/Relevé 2 forms.

1. supplementary death benefit (SDB); and
2. retroactive adjustments to amounts included in the deceased's income (salary, accrued leave, etc.), and retroactive adjustments to amounts that are made to the person entitled by law to share in the estate or the estate (severance pay), where the collective agreement or other authorizing instrument was signed after the date of death.

4.3. Identification of Payments for Income Tax Purposes

Taxation requirements stipulate that statements of remuneration must be issued immediately upon the employee's death. In addition, there are other taxation requirements that require manual intervention that cannot be accommodated via the Regional Pay System (RPS). To satisfy these income tax requirements, manual intervention is required by the pay office. The pay office will, immediately upon the death of an employee, issue the appropriate remuneration statements. The T4s and Relevé 1s are to be issued in the name of the deceased, and accordingly a T4A/Relevé 1 and 2 should be issued for the funds paid to the estate or to the person entitled by law to share in the estate.

Pay offices must forward to the client only copies of the T4, T4A, Relevé 1 and Relevé 2 that are required by the employer and the employee's estate. The copies required by the CRA and the MRQ should be retained and forwarded at year end with the normal February processing.

Information on the paper copies could be different from the electronic information forwarded to the CRA and the MRQ. Therefore, it is important to ensure that the CRA and the MRQ paper copies have "Advance Copy" written on the top centre of the forms; otherwise they may be treated as additional original forms to that of the electronic information resulting in the wrongful belief that the recipient received additional income.

It should be noted that previous year remuneration statement forms should be used if the current year forms are not yet available.

4.4 At calendar year end, remuneration statements (T4, T4A, Relevé 1 and Relevé 2) are issued automatically by the RPS in the name of the deceased, estate of the late or widow(er) of the late. Upon receipt of these statements, compensation advisors will keep them in the employee's personnel file for reference purposes.

4.5. Other Statutory Deductions

The following general principles govern the requirements for deductions under the appropriate legislation.

1. Canada Pension Plan (CPP) and Quebec Pension Plan (QPP) Contributions

   Contributions must be deducted from amounts which are included in the deceased's income only. This includes retroactive adjustments as a result of the signing of the collective agreement or other authorizing instrument before the date of death.

   Note that no deductions are made when the signing of the collective agreement or other authorizing instrument takes place after the date of death.

2. Employment Insurance (EI) and Quebec Parental Insurance Plan (QPIP) Premiums

   Premiums must be deducted from amounts which are included in the deceased's income only. This includes eligible entitlements for which the 10-day rule applies, such as bilingual bonus payable to the end of the month, when applicable.

   Note that no deductions are made when the signing of the collective agreement or other authorizing instrument takes place after the date of death.

3. Public Service Pension Fund (PSPF) Contributions

   Contributions are deducted from salary or wages up to and including the date of death and from adjustments regardless when the authorizing instrument was signed.

4. Supplementary Death Benefit (SDB) Contributions

   Deductions must be taken from salary or wages paid for the month of death and from adjustments as stated in Note 2 of Appendix "A".

4.6 Transfer to a Registered Retirement Savings Plan (RRSP)

Return of Contributions (ROC)

In the case of death, the employee's ROC may be transferred (under Section 147.3(7)) directly to the surviving spouse's RRSP. Those monies transferred directly to an RRSP under these circumstances are not reported as income for the surviving spouse. There is no provision for transferring an ROC to an RRSP in the name of an "estate".

Retiring Allowances

A retiring allowance can never be transferred to a deceased employee's RRSP after the employee's death. This is because an RRSP is a contract between an individual and a financial institution, and such a contract cannot be established once the individual has died. There is no provision for transferring retiring allowances to an RRSP in the name of an "estate".

Where an employee terminates employment and dies before the retiring allowance is paid, the payment retains its character as a retiring allowance. This amount would be reported on a T4A form in the name of whomever received it (i.e. the name of the survivor if paid to an individual or "estate of the late" if paid to the deceased's legal representative).

4.7 Treasury Board Secretariat (TBS) has confirmed that where an employee (who has been employed for a continuous period of one year or more) is on authorized leave without pay (LWOP) and dies, the employee's estate or survivor is entitled to payment for the full month of death even though the employee has received no earnings in that month.

Payment may not be made where death occurs:

• during the off-season in the case of a seasonal employee;
• during a period when the employee is under suspension; or
• during a period when the employee is on unauthorized leave of absence.

4.8 Further information concerning pay for the month of death is contained in the TBS Pay Administration Guide at the following Web site: Termination of Employment

5. INQUIRIES

5.1 Any request for information regarding the foregoing should be addressed to your Public Works and Government Services Canada (PWGSC) Compensation Services Office.

Original Signed by
T. Labelle

Brigitte Fortin
Director General
Compensation Sector
Accounting, Banking and Compensation

Reference(s): CJA 9015-15-3

APPENDIX A

DEDUCTIONS AND REPORTING OF PAYMENTS FOR DECEASED EMPLOYEES

TYPE OF PAYMENT	DEDUCTIONS
	INCOME TAX	CPP/QPP	EI QPIP	PSPF		SDB
				CURRENT	ARREARS
A. Salary or wages up to and including date of death, as well as 10-day eligibility entitlements	Yes	Yes	Yes	Yes	See Note 1	Yes
B. Retroactive adjustments to salary or wages up to and including date of death	See Note 2	See Note 2	See Note 2	Yes	See notes 1 and 2	See Note 2
C. Payment for month of Death. Salary or wages after date of death to end of month of death	See notes 3 and 4	No	No	No	No	Yes
| D. Retroactive adjustments to Payment for month of Death. Retroactive adjustments in salary or wages after date of death to end of month of death	See notes 2, 3 and 4	No	No	No	No	See Note 2
E. Accrued annual and furlough leave and overtime	Yes	Yes	No	No	No	No
F. Retroactive adjustments to accrued annual and furlough leave	See Note 2	See Note 2	No	No	No	No
G. Severance pay (including retroactive adjustments)	See notes 2, 3 and 4	No	No	No	No	No
H. Return of contributions	Yes	No	No	No	No	No

TYPE OF PAYMENT	INCOME TAX REPORTING REQUIREMENTS
	REPORTED AS INCOME OF	FORM	BOX	FOOTNOTE
A. Salary or wages up to and including date of death, as well as 10-day eligibility entitlements	Deceased	T4	14
		Relevé 1	A
B. Retroactive adjustments to salary or wages up to and including date of death	Deceased See Note 2	T4	14	Box 14 includes $______ for which subsection 70(2) Income Tax Act option is available
		Relevé 1	A	Box A includes $______ for which section 429 Taxation Act option is available
C. Payment for month of Death. Salary or wages after date of death to end of month of death	Survivor or estate	T4A	28	Death benefits (code 06) in box 38 "Footnote codes"
		Relevé 1	O	Death benefits (code RK)
D. Retroactive adjustments to Payment for month of Death. Retroactive adjustments in salary or wages after date of death to end of month of death.	Survivor or estate	T4A	28	Death benefits (code 06) in box 38 "Footnote codes".
		Relevé 1	O	Death benefits (code RK)
E. Accrued annual and furlough leave and overtime	Deceased	T4	14	Box 14 includes $______ for which subsection 70(2) Income Tax Act option is available
		Relevé 1	A	Box A includes $______ for which section 429 Taxation Act option is available
F. Retroactive adjustments to accrued annual and furlough leave	Deceased See Note 2	T4	14	Box 14 includes $ ______ for which subsection 70(2) Income Tax Act option is available
		Relevé 1	A	Box A includes $______ for which section 429 Taxation Act option is available.
G. Severance pay (including retroactive adjustments)	Survivor or estate See Note 2	T4A	28	Death benefits (code 06) in box 38 "Footnote codes"
		Relevé 1	O	Death benefits (code RK)
H. Return of contributions	Survivor or estate	T4A	18
		Relevé 2	C

NOTES

Note 1 PSSA arrears are deducted for month of death, only when death occurs on last day of the month.

Note 2 Deductions are made only if the collective agreement or other authorizing instrument was signed prior to date of death. As such, where the collective agreement or authorizing instrument was signed after the date of death , payments are not subject to deductions and are not reported on T4, T4A, Relevé 1 and Relevé 2 forms.

Note 3 Deductions are made at the rates prescribed for lump sum payments except when payments are made to the person entitled by law to share in the estate, a payment up to a total cumulative amount of $10,000.00 is tax free.

Note 4 The total amount reflected in box 28 must be broken down as a footnote, indicating payment made e.g. severance pay and a payment made for balance of month of death.

Note 5 T4A issued upon death of an employee must reflect in the footnote code boxes the "code 06". This must be reflected on the employee's T4A as well as any T4A issued in the name of the estate or beneficiaries.