Two readers at HelpfulCrooks recently asked the same basic question: Who pays the income tax on the CPP Death Benefit if the person who died was penniless? Upon investigating, I’ve concluded that at the very least the federal government needs to change its policies to ensure that sufficient tax is withheld on the CPP Death Benefit to prevent increased stress and financial hardship to executors and beneficiaries.
The CPP Death Benefit is Taxable Income
Many people are vaguely aware that when a person who was eligible for the CPP dies, that person’s estate can usually receive the CPP Death Benefit. This is a one-time payment of up to $2 500. It’s meant to help cover part of the costs of a funeral.
What’s not well known, however, is that the CPP Death Benefit is taxable income and must be declared.
So what’s the problem?
The problem is that the income is NOT able to be declared on the final income tax return for the person who died. That means that even if the person died with such a low income that they could have claimed the $2 500 on their tax return and not had to pay any tax due to the basic personal amount or other deductions, it can’t be reported this way.
- the $2 500 must be declared by the person who received it on their regular personal income tax forms, or
- it must be reported on a T3 Trust Income Tax and Information Return for the estate.
What If There Is No Money to Pay the Income Tax on CPP Death Benefit?
If the person who died left behind some money, that money can be used by the executor (who is often also the beneficiary) to pay the income tax owing on the CPP Death Benefit. Similarly, if the person who died left possessions that could be sold, such as a good TV or car, those possessions could be sold and the money used to pay the income tax owing.
But what if the person who died left nothing behind: No money. No possessions. And, in the worst scenario, only debts?
Then the person who received the Death Benefit must pay the tax on it. Although they can report it on their personal income tax return or on the T3, the actual cheque to pay the tax will have to come from them.
This must seem monstrously unfair.
The person who received the $2 500 almost always has used the money to help pay part of the funeral costs. In many cases, they will have had to pay the rest of the funeral costs themselves. Now, months later, they are discovering that they didn’t actually receive $2 500. Instead they received some amount of money under $2500 and an unexpected tax liability.
The actual amount of tax that will be owing depends on the tax bracket of the person who received the $2500.
I could be doing the math incorrectly because I am not a tax accountant nor have I any personal experience with filing a return that includes this CPP death benefit, but that said if my math is correct:
- if that person earns $50 000 and lives in Ontario and would normally pay $8758 in taxes, with the additional $2 500 in income, they may owe $9536 in taxes, an increase of $778!
- If they earn 150 000 they may owe an additional $1161 in taxes!
If they complete a T3 Trust Income Tax and Information Return for the non-existent estate, it appears the tax payable would be about $375 federally plus about $127 provincial tax (for Ontario), although I admit I am not quite sure I am doing the math correctly as I am not a tax accountant and have no experience with this form. So it might be worth trying to file using the T3 form if the person who received the $2500 “benefit” has a high personal income tax rate.
Admittedly, if a person had received the CPP Death Benefit with an appropriate amount of tax with-held before payment, they would still be out the same amount of money. They would still have to pay the money, but in the form of paying a higher funeral cost bill.
But it avoids the shock of realizing that you suddenly have to come up with $500 or more to pay unexpected income taxes in April.
Can a Person Appeal the Income Tax Cost on the CPP Death Benefit When There is No Estate?
I was speaking to a representative at the Canada Revenue Agency about this issue. We discussed whether there is any way to appeal this income tax cost. His opinion was that although a person could file a T3 form and appeal to have the taxes waived because there is no money from the deceased, it would not likely be approved.
In other words, no.
What Should the Federal Government Do About the CPP Death Benefit NOW
As a first step, the government should implement a with-holding tax on the CPP Death Benefit. They already withhold income tax on many other taxable sources of money such as EI payments and RRSP withdrawals. There is no reason why they couldn’t implement a withholding on this payment as well.
If the person who receives the CPP Death Benefit has an extremely low income themselves, then, when they file their taxes in April and report the death benefit income and the death benefit with-holding tax, they will receive an income tax REFUND for the with-holding tax. Yes, they will have to wait longer to get the full CPP Death Benefit but they will get it.
For those who would otherwise have to pay tax on the CPP Death Benefit, this will allow them to budget realistically both for the funeral and to pay their own income taxes in April.
What Should the Federal Government Do About the CPP Death Benefit in the Future
As a second step, I would like to see the government make the CPP Death Benefit non-taxable, even if this means that the Benefit has to be reduced. It is unnecessarily confusing and upsetting to the recipients to be told they are receiving $2 500 and then to snatch a large amount of it back in taxes.
What Should YOU Do?
I’d like to ask every reader to send a quick email or letter to
asking for these two changes.
The Honourable Kerry-Lynne D. Findlay PC, QC, MP
Minister of National Revenue
555 MacKenzie Avenue
Ottawa ON K1A 0L5
Minister of Finance
The Honourable James M. Flaherty
Department of Finance Canada
140 O’Connor Street
Ottawa, Ontario K1A 0G5
House of Commons
Ottawa, Ontario K1A 0A6
It shouldn’t be a difficult problem to correct and could stop making grieving people have to suffer even more.
If you are in a hurry, you are welcome to cut and paste the text near the end of this post into your letter or email message.
- What Is the Canada Pension Plan Death Benefit and How to Apply For It
- Line 114 CPP or QPP Death Benefit (Box 18)
- T3RET T3 Trust Income Tax and Information Return
Do you find this issue to be an unnecessary insult to the person trying to cope with the funeral and end-of-life issues for a destitute friend or relative? Do you know someone who has been blindsided by the huge tax liability for this “Benefit”? Please share your views and experiences with a comment.
Sample Text for a Letter to the Minister of Finance or your MP
I am writing to request an immediate change to the way the CPP Death Benefit is paid out. Specifically, I am asking that a with-holding tax be applied to all future payments of the CPP Death Benefit.
At this time, no income tax is with-held on the CPP Death Benefit even though the benefit is fully taxable.
This can create a shocking tax burden for the person who receives the CPP Death Benefit and uses it to pay the last expenses for a deceased friend or relative. The recipient often does not know that they will have to claim the Death Benefit on their PERSONAL income tax return and pay taxes on it, or claim it on a T3 tax form and still pay taxes on it. If the deceased person had no money or possessions at the time they died this income tax liability will come out of the pocket of the recipient.
By with-holding the required income tax on the CPP Death Benefit BEFORE it is paid out, the person receiving the benefit will not be hit with an unexpected tax penalty when filing their annual tax return in April. If they are eligible, instead, they will receive a tax refund upon filing their April return.
In the long term, I would also like to request that the government consider revising how the CPP Death Benefit is paid so that it is paid on a tax-free basis. This may require reducing the Death Benefit but it will prevent confusion and costs to the person receiving the Benefit.
Tax is withheld on many other sources of income including EI payments and RRSP withdrawals. It needs to also be withheld on this “Benefit.”
A Concerned Honest Taxpayer