As members of the CSS Pension Plan, it's important to understand how death benefits are taxed under the Income Tax Act (ITA) of Canada. This article aims to clarify the taxation of death benefits from CSS Pension Plan and registered retirement income funds [like a Life Income Fund (LIF) or Prescribed Registered Retirement Income Fund (pRRIF) from your credit union or financial institution].  

Death benefits from CSS Pension Plan

A pre-retirement death benefit will be payable if a CSS member passes away before they start their retirement income. A post-retirement death benefit will be payable if they pass away after starting their retirement income.  

Pre-retirement death benefits 

Contribution and/or transfer-in account death benefits: 

1. Amount:
   • The death benefit equals the account balance (e.g., contributions plus investment earnings). 
2. Payable to whom:
   • Spouse: If there is a spouse at the date of death, the benefit is payable to that spouse unless the spouse has waived this automatic entitlement. The spouse can choose to establish their own CSS Pension Plan account and leave the death benefit in that account. Alternatively, the spouse can transfer-out the death benefit following applicable pension law
   • No spouse: If there is no spouse at the date of death (or they have waived this entitlement), the death benefit is paid to the named beneficiary, or if none, to the estate. The death benefit is payable as a lump-sum amount to the beneficiary(ies) or estate. 
3. Taxation:
   
   • Spouse: The death benefit rolls tax-deferred to the spouse. The spouse is taxed only as they begin to take a retirement income or cash. A T4A slip will be issued to the spouse for any amount they took as income or cash.
   • Beneficiary: The death benefit is paid as a lump-sum amount (less withholding taxes) to the beneficiary(ies) and is taxable in the hands of the beneficiary. A T4A slip will be issued to the beneficiary(ies).
   • Estate: The death benefit is paid as a lump-sum amount (less withholding taxes) to the estate and is taxable in the hands of the estate. A T4A slip will be issued to the estate.

Post-retirement death benefits

Variable Benefit (VB) account death benefits: CSS Pension Plan permits members to establish a retirement income through Variable Benefit payments (VB payments). VB payments are payable from a Variable Benefit account held directly in the member’s CSS Pension Plan account. 

1. Amount:
   • The death benefit equals the account balance at time of transfer/withdrawal (e.g., contributions plus investment earnings).
2. Payable to whom:
   • Spouse: If there is a spouse at the date of death, the benefit is payable to that spouse unless the spouse has waived this automatic entitlement. The spouse can elect to continue the Variable Benefit account in their own name and continue to receive the VB payments. Further, the spouse can elect to convert the death benefit into a monthly pension from CSS Pension Plan. Alternatively, the spouse can transfer-out the death benefit following applicable pension law.
   • No spouse: If there is no spouse at the date of death (or they have waived this entitlement), the death benefit is paid to the named beneficiary, or if none, to the estate. The death benefit is payable as a lump-sum amount to the beneficiary or estate.
3. Taxation:
   • Spouse: The death benefit rolls tax-deferred to the spouse. The spouse is taxed only as they begin to take a retirement income or cash. A T4A slip will be issued to the spouse, for any amount they took as income or cash.
   • Beneficiary: The death benefit is paid as a lump-sum amount (less withholding taxes) to the beneficiary and is taxable in the hands of the beneficiary. A T4A slip will be issued to the beneficiary.
   • Estate: The death benefit is paid as a lump-sum amount (less withholding taxes) to the beneficiary and is taxable in the hands of the estate. A T4A slip will be issued to the estate
     

CSS monthly pension death benefits (aka post-retirement monthly pension): CSS Pension Plan permits members to establish a retirement income in the form of a CSS monthly pension. This pension may be a Single-Life Monthly Pension or a Joint-Life Monthly Pension.

1. Amount:
   • Single-Life Monthly Pension: The death benefit equals the remaining payments in the guarantee period (a guarantee period can be 0-years, 10-years or 15-years). If there is no guarantee period left, there will be no death benefit payable.
   • Joint-Life Monthly Pension:
     • If the joint-life (i.e., the spouse) member is alive, they will continue to receive a pension for the rest of their life. This is called a “survivor’s benefit.” 
     • If the joint-life member is no longer alive, the death benefit equals the remaining payments in the guarantee period (a guarantee period can be 0-years, 10-years or 15-years). If there is no guarantee period left, there will be no death benefit payable.
2. Payable to whom:
   • Single-Life Monthly Pension: The death benefit is payable to the named beneficiary(ies), or if none, to the estate. This is typically paid as a lump-sum amount.
   • Joint-Life Monthly Pension:
     • If the joint-life member is alive, the survivor’s benefit is payable to that person.
     • If the joint-life member is no longer alive, the death benefit is payable to the named beneficiary(ies), or if none, to the estate. This is typically paid as a lump-sum amount. 
3. Taxation
   • Joint-life member: The survivor’s benefit is a monthly pension taxable in the hands of the recipient. A T4A slip will be issued to the joint-life member.
   • Beneficiary: The death benefit is typically paid as a lump-sum amount (less withholding taxes) to the beneficiary and is taxable in the hands of the beneficiary. A T4A slip will be issued to the beneficiary. 
   • Estate: The death benefit is paid as a lump-sum amount (less withholding taxes) to the beneficiary and is taxable in the hands of the estate. A T4A slip will be issued to the estate. 

Death benefits from retirement products held at a credit union or financial institution 

Locked-In Retirement Account (LIRA) death benefits (pre-retirement): A Locked-In Retirement Account (LIRA) is much like a Registered Retirement Savings Plan (RRSP), except it typically holds pension monies (locked-in) that must be used for a future retirement income.

1. Amount:
   • The death benefit equals the account balance at time of transfer (e.g., contributions plus investment earnings)
2. Payable to whom:
   • Spouse: If there is a spouse at the date of death, the benefit is payable to that spouse unless the spouse has waived this automatic entitlement. The spouse may be given the option to transfer the death benefit to an RRSP/LIRA in their own name.
   • No spouse: If there is no spouse at the date of death (or they have waived this entitlement), the death benefit is paid to the named beneficiary, or if none, to the estate. The death benefit is payable as a lump-sum amount to the beneficiary or estate.
3. Taxation:
   • Spouse: The death benefit rolls tax-deferred to the spouse. The spouse is taxed only as they begin to take a retirement income or cash
   • Beneficiary or estate: The death benefit is paid as a lump-sum amount to the beneficiary or estate (no tax is withheld). The full amount is taxable in the hands of the estate. 

Prescribed Registered Retirement Income Fund (pRRIF) death benefits (post-retirement): A Prescribed Registered Retirement Income Fund (pRRIF) (in some pension jurisdictions this may be called a Life Income Fund, or similar) is much like a Registered Retirement Income Fund (RRIF), except it typically holds pension monies (locked-in) that must be used for retirement income. 

1. Amount:
   • The death benefit equals the account balance (e.g., contributions plus investment earnings).
2. Payable to whom:
   • Spouse: If there is a spouse at the date of death, the benefit is payable to that spouse unless the spouse has waived this automatic entitlement. The spouse may be given the option to transfer the death benefit to an RRSP/LIRA in their own name.
   • No spouse: If there is no spouse at the date of death (or they have waived this entitlement), the death benefit is paid to the named beneficiary, or if none, to the estate. The death benefit is payable as a lump-sum amount to the beneficiary or estate.
3. Taxation:
   • Spouse: The death benefit rolls tax-deferred to the spouse. The spouse is taxed only as they begin to take a retirement income or cash.
   • Beneficiary or estate: The death benefit is paid as a lump-sum amount to the beneficiary or estate (no tax is withheld). The full amount is taxable in the hands of the estate. A tax slip is issued in the name of the deceased.

Executor and beneficiary liability

According to Section 159 of the ITA, an estate's legal representative (executor) is jointly and severally liable to the deceased for any unpaid taxes to the extent that they possess or control the deceased's property. If the estate distributes funds to beneficiaries without holding back enough to pay the tax, the CRA can pursue the executor and beneficiaries for the shortfall (All About Estates, 2023). This is important when considering the tax implications to the estate of death benefits payable from a LIRA/RRIF type of product. 

Conclusion

Understanding these differences is crucial for CSS Pension Plan members to manage their financial planning effectively.

Knowing how death benefits are taxed, members can better prepare for the future and ensure their beneficiaries know their tax responsibilities. 

If you have any questions or need further clarification, please feel free to connect with a CSS Retirement and Pension Advisor and/or your trusted tax and estate professionals.

In Summary

References

All About Estates. (2023). CRA Keeps A-Knockin’ (and Can Come In). Retrieved from https://www.allaboutestates.ca/cra-keeps-knockin/  

Canada Revenue Agency. (2023). Chapter 14 - 8506 – Money Purchase Provisions. Retrieved from https://www.canada.ca/en/revenue-agency/services/tax/registered-plans-administrators/registered-plans-directorate-technical-manual-13.html  

Canada Revenue Agency. (2023). Registered Retirement Income Funds. Retrieved from https://www.canada.ca/en/revenue-agency/services/forms-publications/publications/ic78-18/registered-retirement-income-funds.html  

All About Estates. (2023). Tax Liability of a Deceased Taxpayer. Retrieved from https://www.allaboutestates.ca/tax-liability-of-a-deceased-taxpayer/