12 April 1995 External T.I. 9432335 - DEATH BENEFITS

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:

Whether the reference to employee in the definition of "death benefit" in subsection 248(1) of the Act includes a former employee.

Position TAKEN:

Yes, in the general context of death benefits.

Reasons FOR POSITION TAKEN:

Consistent with position held since the early '60s and alluded to in IT-508 at paragraph 1.

		943233
XXXXXXXXXX	J.A. Szeszycki

Attention: XXXXXXXXXX

April 12, 1995

Dear Sirs:

Re: Death Benefit

This is in reply to your letter of December 6, 1994 in which you requested that the Department clarify its position concerning the application of the definition of the term "death benefit" to payments made to former employees. We apologize for the delay encountered in providing you with a response.

In your letter you set out a hypothetical situation in which a corporation pays an amount to the surviving spouse (or other beneficiary) of an individual who is a former employee of the company. The payment is described as being in recognition of the retiree's service to the company and is paid upon the death of the individual. In your view, the payment should be considered a "death benefit" as that term is defined in subsection 248(1) of the Income Tax Act.

You have noted in your letter three documents which relate positions of the Department that appear to represent conflicting interpretations as to the application of the death benefit definition to payments made to former employees.

Before referring to the specific documents, we would like to first clarify that any amount received by a taxpayer upon or after the death of an individual who was an employee, or former employee, in recognition of the individual's service to the employer would qualify as a death benefit. In contrast, any amount received by the taxpayer in respect of which the individual was already entitled prior to his or her death will generally retain its character for tax purposes when paid by the employer after the individual's death. For example, where an individual who is a former employee of the company and upon retirement became entitled to a retiring allowance but died prior to receiving the payment, the amount when paid will retain its character as a retiring allowance. The payment does not convert to a death benefit simply because the person in respect of whom it is paid is now deceased.

As indicated in the April 1, 1992 letter to which you referred, paragraph 1 of IT-508, "Death Benefits - Calculation" relates the Department's position that the term "employee" when used in the context of death benefits can be reasonably broadened to include a former employee.

The February 5, 1992 letter dealt strictly with the distinction between the treatment given payments by the employer on account of accumulated sick leave credits in situations where the employee had already retired, and where the employee was still employed at the time of death. Payments on account of accumulated sick leave credits can be paid out in three ways; (1) as an annual cashout, (2) as a payment in recognition of service where the employee has died while still employed, and (3) as a payment in recognition of long service upon retirement. The annual cashout of credits would be treated as ordinary employment income. Where the employee has died while still employed the payment would be treated as a death benefit since its payment was triggered by the death of the employee. Where the employee has already retired and, as part of the severance package, becomes entitled to a payment on account of unused credits the payment is treated as a retiring allowance, and if the retiree dies before having received that payment, the eventual recipient of the payment will be considered in receipt of the former employee's retiring allowance. In short, in the context of unused sick leave credits, once an employee becomes a former employee the eventual payment on account of the unused credits will not qualify as a death benefit.

Similarly, a distinction can be made between amounts to which a retiree becomes entitled under a supplementary retirement plan and an amount to which a deceased employee may be entitled under the terms of the plan if the death occurs prior to retirement. The former may be treated as retirement income while the latter, if paid in recognition of the employee's service, may be treated as a death benefit.

We hope our comments will help to clarify the Department's position on this issue.

Yours truly,

P.D. Fuoco
for Director
Business and General Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch