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.
Instead,
- 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
- your MP and/or
- the Minister of National Revenue and/or
- to the Minister of Finance
asking for these two changes.
The Honourable Kerry-Lynne D. Findlay PC, QC, MP
Minister of National Revenue
7th Floor
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
or
House of Commons
Parliament Buildings
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.
Related Reading
- 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
Join In
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
Dear Sir/Madam,
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.”
Sincerely,
A Concerned Honest Taxpayer
I hadn’t thought about this issue before. This would be a good one to run past the Blunt Bean Counter to get his view on your uncertainties about the accounting as well as his take on either implementing a withholding tax or making the benefit tax-free.
Yes, it would be great if he could chime in.
The person I spoke with at the CRA was all in favour of a with-holding tax. He said he has to deal steadily with people calling in shock and frustration because they find out they have a big tax bill to pay, and there is literally no money to pay it with. A with-holding tax wouldn’t stop anyone from getting their full entitlement, eventually, but it would reduce the problem for people who are going to have to pay tax on the benefit.
I check the BBC website at found he has addressed this type of issue a bit partway through his post Confessions of a Tax Accountant -2013- Week 1
If I’m reading his post correctly, he is saying that in most cases a T3 is the preferable way to file even with the extra work even for an estate with little or nothing in it.
I just got the news today, (more than a year after death) that money would be owing on the death benefit, and even though I`m on Disability, I will be forced to pay it, even though I was the only one left to pay even my mother`s income tax when she died, part of the money of the death benefit had to be used to pay for the funeral, because all my mother`s money had been stolen. This should not have to be my burden.
My brother and his daughter upon finding out, that my mother had terminal cancer and maybe only a few weeks to live, within 2 weeks, they changed the POA to remove me, so it was just him and his daughter. My brother convinced every bank to turn over $100,000+ to himself, even though my mother had told the banks I was her POA, and that I had right of survivorship on all bank assets. I was to get $500 a month, and so it would have lasted me years, but he spent it all, because he knew, in this town he could get away with it, just keep lying, and delaying until my mother died, knowing I would have no money to pay a lawyer.
The lawyer claimed he was told I was too Mentally Disabled and might remove large sums or write cheques, (and that the house should also be put in his daughter`s name, took a year, but she finally got it back from the grand daughter). When informed that I was not retarded and was highly intelligent, the lawyer, lied to my mother and claimed he had never met me, so had no idea my brother was lying to him. I know he lied because when I was in his office a few weeks earlier, claiming the money had been stolen, he had no trouble remembering that I had been to his office before, and in fact said it was `my fault` that he never talked to me, even though he knew in the Will my brother was to get only a token few thousand of the estate and 98% of the estate went to me.
While the police told me it would take a year or two, (it`s been over 3) they told my mother that she really should take care of it herself, while her lawyer told her since she had no money, she should leave it in the hands of the police. So my mother got another lawyer, who took all her pension money, then said he had made a deal to get most of the money back, but she had to wait a few months. After promising to payback the money, my brother later claimed he was broke and had no money, and even though he was required to present all his financial records, he has not done so, and some lawyer wants $2,000 just to notify the court, apparently I don`t qualify for legal aid as it`s too complicated for them. We`ll $2,000 is more than I am allowed for food, for the entire year. I cut out TV entirely just so I could have some extra money to buy food, and my internet is dial up, because it`s less than $30 a month, so at least I have some idea what`s going on in the world.
My mother had to get off her death bed, and out of the hospital, (because they were charging her Nursing Home fees) so she could file a police report, and eventually have enough pension to give to the new lawyer, during which time, I paid all the utilities, and phone etc, and anything left went to buy food, and liquid meals for my mother. My mother couldn`t even afford to buy a hospital bed to be at home, and only a few weeks before she died, did someone donate one.
But did my brother have to pay a dime in taxes on the money stolen, no, but I bet if there was a tax to be paid, no doubt the government would come after me to pay it. So my mother died, my inheritance was stolen, I was slandered and libeled so that no one would help me, and now the tax man wants `me` to pay, while my brother and his daughter seemingly go free. Where is the justice I ask you.
I’m very sorry to hear this. It sounds terrible. And I really wish they would change the Death Benefit so that it is paid on an “after tax” basis so that no one else gets caught with a tax bill unexpectedly.
I have a little different scenario. When doing my dads income tax the first time I had forgotten to included the $2500.00 death benefit he received for his wife, and he had zero balance owing. However after I corrected it, he now owes $125.00 on his return. Although he doesn’t owe any taxes on the money, it raised his taxable income over the $20,000. level and now he has to pay the Ontario Health Premium it calculated of $125.00.He is 93 years old and he has never had to pay this health premium before as his taxable income is never over $20,000. I agree that this benefit should be tax free even if they have to reduce it a bit. This amount is to help with funeral costs and they don’t let you deduct any portion of them, so why is this benefit taxable???? .
The strange reasoning seems to be that CPP is a pension and therefore ANY income from CPP is taxable: so they tax the CPP itself, but also the survivor’s benefit, the child survivor’s benefit and the death benefit. Then, for what I suspect are political reasons, they make it sound like they are providing $2500 to help pay for the funeral, when in reality, they are providing much less than that to many people.
I’m sorry your father had to pay tax on it and to pay the Health Premium. It doesn’t seem right to me, either.
The right thing is of course to treat the 2500 as a non-taxable amount to anyone. But to be realistic, the after tax amount is the key. So I would say that 39.37% of 2500 should be paid out the taxrate of most people in Ontario. So that would be 1,500 cheque to the executor spouse etc. No tax liabilities to anyone dead or alive. P.s. in my opinion funeral expenses should get a 15% non refundable credit against the deceased final tax return.of course. Coffin burial funeral home expenses will make seniors happy.
If Service Canada would only listen to taxpayers the CRA would be happier, too!
Basically it is not a “benefit” at all. Benefits are free money no taxes etc by the name itself. The Government is getting their pound of flesh on this one for sure. Seems they taxes 3 times from the same lot of money. First from the deceased CPP, then from the Estate or Executor who receives the “benefit” and then because funeral expenses are not deductible the result is taxes paid on the “final” taxes submitted for the deceased or Estate. One question in what part of the Canada can a funeral be got for $2500 let alone what is left after taxes. This “benefit” as mandatory income increases the beneficiaries yearly income which in effect will net additional taxes no matter what bracket they are in and it doesn’t even make a drop in the bucket for the funeral expenses. Even a very simply no frills cremation runs $3000 by the time fees and municipal, provincial and federal taxes are added in. If they (government) are not going to take the requests of the PEOPLE on this then they need to change the name from “benefit” to reflect a taxable item. Many would be better off without applying for it as it stands now. JMHO
I understand your upset and I agree that they should reduce the amount payed out so there is no tax payable.