Death Benefit

Table of Contents

Administrative Policy

21 July 2017 Internal T.I. 2017-0714931I7 F - Retiring allowance - Sick Leave

includes payout on death of accumulated (non-excess) sick leave credits

Under a collective agreement, an employee's sick leave credits (net of days used) are accumulated in a reserve ("Reserve") and, in December of each year, paid out in cash based on any excess over 20 days on September 30 of that year (with the balance carried forward). Would the payout of the balance in the Reserve (not exceeding 20 days and based on the current salary) on the employee's resignation, dismissal, or retirement qualify as a retiring allowance – or as a death benefit if paid on the employee’s death? CRA responded:

[T]he portion of the amount paid… in respect of the maximum…20 ,,, days sick leave in the Reserve at the time of retirement or in respect of the loss of employment may be considered a retiring allowance. ...

In a case where an employee dies while still employed … the portion of the amount paid … in respect of the compensation for the maximum twenty (20) days sick leave in the Reserve would be a death benefit since this portion of the allowance would be paid as a result of the employee's death.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 248 - Subsection 248(1) - Retiring Allowance payout of accumulated (non-excess) sick leave credits on termination of employment was a retiring allowance 159
Tax Topics - Income Tax Act - Section 5 - Subsection 5(1) payout on termination of accumulated sick leave credit is employment income to extent otherwise would have been paid at year end 82

14 March 2017 External T.I. 2016-0656101E5 F - Death Benefit

sole shareholder who did not receive salary every year could receive a death benefit/staggered payment

An individual, who was the sole shareholder of a corporation, received, as an employee, wages for several years but only dividends in the two years preceding his or her death. Alternatively, the individual received only dividends, without any salary or other remuneration as an employee. Would an amount paid by the corporation on the shareholder’s death qualify as a death benefit? Can authorizing minutes by the board be done after rather than before death? Is there a time limit for paying a death benefit? CRA responded:

In the first situation…[if] a genuine employment relationship existed… over the years and the corporation paid him or her a salary in consideration for his or her services rendered during those years, the failure to pay a wage to the individual during the two years preceding his death would not result in the amount paid by the corporation to the employee not being a death benefit.

…[I]n the second situation…the amount paid is not a death benefit because it is not reasonable to assume that it is paid in recognition of the individual's services, as an employee, rendered in the course of an office or employment. …

After indicating that when the amount was recorded in the minutes did not affect its character, CRA stated that “the payment of the death benefit may be staggered over more than one taxation year.”

22 February 2016 External T.I. 2014-0525681E5 - Taxation of inherited pension plan payment

payment out of a pension plan to a beneficiary of deceased employee was a pension rather than death benefit payment

A U.S. citizen is resident in Canada and was the beneficiary of a deceased U.S resident who had been a retired member of a U.S. public pension plan. A payment received under the plan by the beneficiary would be of a “superannuation or pension benefit” (includible in income under s. 56(1)(a)(i)) rather than of a “death benefit” (generally includible under s. 56(1)(a)(iii) but subject to a $10,000 exclusion from income).

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 248 - Subsection 248(1) - Superannuation or Pension Benefit pension paid to beneficiary of deceased employee was pension rather than death benefit 284
Tax Topics - Treaties - Income Tax Conventions - Article 18 exclusion re US estate tax 325

13 September 2012 Internal T.I. 2012-0442671I7 F - Dédommagement pour la perte de bénéfices

damages received for loss of life insurance coverage were not rendered a death benefit under the surrogatum principle

The former employees and retirees of a bankrupt corporation (the "Employer") received a lump for the cancellation of their rights in a group insurance plan and respecting legal costs incurred to recover the lump sum. The lump sum received for the Plan cancellation included compensation for the loss of medical and dental coverage and hospitalization coverage for themselves and their dependents (respecting the "Medical Plan"), as well as the loss of life insurance coverage (the "Coverage"). Damages also were claimed for the amounts owing under the Employment Standards Act (the "Dismissal Amount").

After finding that the portion of the lump sum allocable to the termination of the Medical Plan was taxable, and in going on to find that that portion allocable to the lost Coverage also was taxable to the recipients, the Directorate first rejected the taxpayers’ (“Objectors’”) submission that such amounts qualified as a “death benefit,” stating:

An amount received may qualify as a "death benefit" within the meaning of subsection 248(1) only if it is received by a taxpayer on or after the death of an employee or former employee. Thus, in applying the surrogatum principle as it is relied on in Tsiaprailis … the portion of the lump sum received by the Objectors for the loss of their Coverage entitlement cannot qualify as a death benefit within the meaning of subsection 248(1) since it is the Former Employees or Retirees who received the benefit. In addition, the indemnity cannot replace a death benefit since people insured under the life insurance policy are still alive.

Rather … the portion of the lump sum that the Opponents received that relates to the Coverage is intended to replace the insurance premiums that the Employer was required to pay under the term life insurance policy to provide life insurance coverage that the Objectors benefited from under the Plan.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 6 - Subsection 6(1) - Paragraph 6(1)(a) - Subparagraph 6(1)(a)(i) damages received after 2011 by employees of an insolvent company for cancellation of their medical plan have become taxable 306
Tax Topics - Income Tax Act - Section 6 - Subsection 6(3) damages received by former employees of insolvent company for cancellation of their life insurance coverage were received in lieu of remuneration for their employment services 267
Tax Topics - Income Tax Act - Section 8 - Subsection 8(1) - Paragraph 8(1)(b) legal fees paid to recover damages for employer cancellation of insurance coverage, and medical plan, qualified and did not qualify, respectively 337

12 April 1995 T.I. 943233 (C.T.O. "Death Benefits")

The reference to an "employee" includes a former employee.

5 February 1992 T.I. (Tax Window, No. 16, p. 9, ¶1732)

If an individual who died was still an employee, a payment in lieu of accumulated sick leave may be treated as a death benefit. However, if the employee dies after retirement, the payment for accumulated sick leave credits is a retiring allowance.

30 May 1990 T.I. (October 1990 Access Letter, ¶1460)

Where an employer's pension plan carries an insurance policy which pays annuities to the surviving spouse if she has custody of the deceased's children, the annuities will be included in her income.

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