13 July 1998 External T.I. 9813535 - EMPLOYER PAYMENT: DECEASED EMPLOYEES KIDS.

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the Department.

Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle du ministère.

Principal Issues: proposed payment to children of employees killed on job. damages?

Position: Not likely but may be death benefits or gift.

Reasons: No obligation or law suit; strictly voluntary.

XXXXXXXXXX 				981353
D. Duff

Attention: XXXXXXXXXX 

July 13, 1998

Dear XXXXXXXXXX:

This is in response to your letter of May 28, 1998, and further to your telephone conversation (XXXXXXXXXX/Duff) of June 2, 1998, requesting our views on a proposed payment by your client for the benefit of the children of two employees killed on the job.

You stated that any assistance would be completely voluntary by the employer and there was no legal obligation or lawsuit involved. It was not in lieu of any other benefits. Also, there was no other connection between the employer and these children other than through the previous employment of the deceased individuals. The employer was considering making payments directly to the mothers or to a trust for the children and either in a lump sum amount or in a series of payments. The employer was also considering funding a registered education savings plan ("RESP") for each of the children. You requested our position as to whether these payments would be general damages as described in Interpretation Bulletin IT-365R2 and whether the payment would be deductible to the employer.

Our Comments

Confirmation of tax consequences with respect to proposed transactions involving specific taxpayers will only be provided in response to a request for an advance income tax ruling submitted in accordance with Information Circular 70-6R3 dated December 30, 1996. However, we can provide the following general comments which may or may not apply to taxpayers involved in your request and which, in accordance with the above-mentioned Information Circular, are not binding on the Department.

You state that the proposed payments are completely voluntary and there is no lawsuit involved. Black's Law Dictionary defines the term "damages" as:

"A pecuniary compensation or indemnity, which may be recovered in the courts by any person who has suffered loss, detriment, or injury, whether to his person, property or rights, through the unlawful act or omission or negligence of another. A sum of money awarded to a person injured by the tort of another."

Payments made that are completely voluntary, made at the sole discretion of the employer and not paid for loss of life or any other loss, would not likely be considered to be an amount paid for damages.

Subsection 248(1) of the Income Tax Act ("Act") defines a "death benefit" as "the total of all amounts received by a taxpayer in a taxation year on or after the death of an employee in recognition of the employee's service in an office or employment minus", basically, $10,000. Death benefits are discussed in more detail in interpretation bulletin IT-508R. Paragraph (3) of IT-110R3 defines a gift for the purposes of the deduction or credit pursuant to subsections 110.1 or 118.1, respectively, to be a voluntary transfer of property without valuable consideration. Although this definition is for gifts to registered charities and certain other organizations it is the criteria generally required for such a transfer of property to be considered a gift by the Department. If such a transfer was a gift to the mothers or to the children no amount would have to be included in income. Whether the proposed payments might be a death benefit or a gift to the recipients is a question of fact that can only be determined after all of the terms of the proposal are known.

Paragraph 18(1)(a) of the Act prohibits a deduction for an expenditure unless it was made or incurred by the taxpayer for the purpose of gaining or producing income from the business or property. From your comments it appears the payment is being considered because the employer wishes to assist the children of the deceased employees and is not for the purpose of gaining or producing income. As above, a determination cannot be done until all of the facts are known, however, in our view, the payments would not be deductible unless they, in fact, are made for the purpose of gaining or producing income.

We trust our comments will be of assistance to you.

Roberta Albert, C.A.

for Director
Business and Publications Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch