I’m currently handling an estate where the deceased had a Life Income Fund (LIF) with a named beneficiary. The taxpayer passed away in 2023, and the LIF was paid out to the beneficiary in 2024. The beneficiary is a non-resident. Below is a breakdown provided by the financial institution:
There were 2 payments made to the beneficiary, one was for $42,044.83 which would have been the value as of the date of the death, then there was another payment of $6,767.33 less $1691.83 holding tax. This would represent the increase in the value of the LIF until it was cashed out.
I have a question regarding the reporting on the T1 final return (deemed disposition) and on the T3 trust return.
Any guidance you can provide would be greatly appreciated!
Hello, Deepinthemoneycall,
I have to apologize for incorrect info. Got lost in many estate cases… As reported by the financial institution, the payment was done as this:
There were 2 payments made to the beneficiary, one was for $42,044.83 which would have been the value as of the date of the death, then there was another payment of $6,767.33 less $1691.83 holding tax. This would represent the increase in the value of the LIF until it was cashed out.
The beneficiary either a neece or a cousin in USA. The deceased was not married.
My question is how to report LIF on T1 final return as a part of deemed disposition of assets? It is not the same as RRIF and there is a LIF beneficiary.
Am I correct assuming that the amount of $42.044.83 (value at the date of the death) is included in the final T1 as income (the same as RRSP or RRIF) although was paid directly to a beneficiary?
The increase of $6767.33 was paid directly to a beneficiary as well but later. Does the Trust have to report it?
If the investments (registered in the LIF) were transferred into the name of the beneficiary fairly soon after the deceased’s date of death, then you can assume the majority of the earnings “belong” to the beneficiary, and no need to report on the T3. Even if you report the income on the T3, it could be deducted on the T3 if it was paid out to the beneficiary in the same fiscal year (i.e. first fiscal year of the GRE). Which means the beneficiary would have to report the income on their own T1 (note: it’s the executor or legal administrator that must decide whether or not to deduct it on the T3).
Where/how will the CPP death benefit be reported? CRA says it doesn’t have to be reported on a T3 if it is the “only income to report”. So, technically, if you have both a T4A(P) and a T4RIF, you should be reporting it all on a T3. But, given the amounts involved, I don’t expect CRA would pursue the missing T3 as long as all the income is reported by the beneficiary.
That said, it may be better to report the income on a T3 (GRE), depending on the beneficiary’s other income and tax situation. You have to look at both possibilities - which method will be cheaper overall, considering that “someone” will have to pay you to do this analysis, as well as prepare and file the T3.
A CPP/QPP death benefit will generally not be taxable if the recipient is not the estate or a beneficiary of the estate, and all of the following circumstances apply:
The taxpayer who received the death benefit paid the deceased’s funeral expenses
The amount of the death benefit is not more than the funeral expenses
The deceased has no heirs, and there is no other property in the estate"
Although both payments were made in almost a year after the date of the death, I will not be reporting the increase since a beneficiary was a named (designated) beneficiary on the LIF agreement. I will leave it to the beneficiary to deal with the taxes given that the financial institution withheld 25% tax (our named beneficiary is a USA citizen). I assume that they will issue a tax slip as well.
Thank you for your help!
It’s not the payments that make the difference - it’s the “ownership” of the investment account and how much income was earned. If the investments continued to earn income (interest, dividends, etc) after the original owner died, then who owned them? It usually takes a few months to get the account transferred into a beneficiary’s name. During that time, any earnings “belong” to the estate, and should be reported on a T3. So, what I meant was:
Determine the date that the investment account ownership officially (legally) changed.
Any investment earnings between the date of death and the date of change in ownership should be reported by the estate.
Any investment earnings after the change in ownership should be reported by the new owner (beneficiary).
The $6767.33 may not be entirely “investment income” - some of it may be principal, which, when returned to the owner, is not taxable. You should technically determine the breakdown of that amount.
Notwithstanding any of the above, if the income amounts are small, then the tax owing will be even smaller, and CRA will not spend much time trying to determine whether a T3 should have been filed, and how much tax should have been paid by the estate. However:
The amount withheld by the LIF issuer may be more than what the beneficiary actually needed to remit. The beneficiary should file a T1 (possibly a non-resident return?) to report the CPP death benefit (if he/she received it) and any investment income.
Well, this looks more complicated than I was hoping…
I thought that if the account has a named beneficiary it doesn’t go to the trust. I will investigate this further, thank you for your thorough instructions!
I have been reading about the trusts on CRA’s platforms but the information is so limited.
The financial institution did not issue a tax slip and doesn’t even respond emails, just sent a breakdown of the payment. I will try to get more info via the lawyer. Nezzer, I am very thankful for your guidance.
The circumstances about CPP not being taxable are set up in such a way to circumvent the CRA from chasing the tax liability on the death benefit where they have no legal means to collect said taxes.
Where a person dies, there is a specific order to the person’s debts and they have to be paid in that order.
The first priority is that the person has to be buried. Therefore, funeral expenses are the first debts to be paid. Due to this, CPP death benefit must be paid to the person who paid the funeral expenses. If the death benefit is used entirely for the funeral, no other debts, including taxes, can be paid.
The CRA is out of luck trying to collect.
I imagine they wrote those conditions because they didn’t want to be chasing after an uncollectible debt.