19 June 1997 External T.I. 9715835 - DEATH BENEFIT TO SURVIVING SPOUSE

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 an amount paid remains a "death benefit" if it is paid in "the form of life insurance over a three year period."

Position:

remains a death benefit, taxable under 56(1)(a)(iii), if there is no insurance being contemplated (verbally confirmed by client). If the employer does purchase life insurance for employees then the payment of the premium will trigger an income inclusion under either para. 6(1)(a) or ss. 6(4) of the Act, depending upon whether the insurance is "group term life insurance."

Reasons:

general comments only offered as client has stated that there is no life insurance in place and that the phrase "in the form of life insurance" is only being contemplated for "tax purposes." There is no indication that what is being paid is other than a death benefit.

971583
XXXXXXXXXX Sandra Short

Attention: XXXXXXXXXX

June 19, 1997

Dear Sirs:

Re: Death Benefit to Surviving Spouse

This is in reply to your letter of June 12, 1997, sent to Serge Brissette at the Ottawa Tax Services Office, and forwarded to us for an interpretation. You have asked the tax implications of amending an article contained in a collective agreement from

(a)if a Police Officer is killed on duty, surviving spouse will receive three years' salary
to

(b)surviving spouse of an Officer killed on duty shall receive, in the form of life insurance, payable by the Board, the equivalent of 3 years' salary, spread over the next 3 years.

Our Comments

The payment of the equivalent of three years' salary to the surviving spouse of an officer killed on duty would be categorized as a "death benefit," as that term is defined in subsection 248(1) of the Income Tax Act (the "Act"). Death benefits are required to be included in income under subparagraph 56(1)(a)(iii) of the Act. If the sole surviving spouse is the only person to receive the death benefit, the spouse is required to include in income the amount of the death benefit received, less $10,000. The $10,000 amount is taken from the aggregate of all amounts received on or after the death of the employee, in recognition of the employee's service. Thus, if the death benefit is paid to the surviving spouse over a period of three years, with each year's benefit being in excess of $10,000, only the first year's total payment would be reduced by $10,000. Death benefits are explained more fully in the attached Interpretation Bulletin IT-508. In accordance with paragraph 153(1)(d) of the Act, income tax must be withheld at source from the payment of death benefits.

As discussed in our telephone conversation of June 16, 1997 (XXXXXXXXXX/Short), the intention of the proposed amended wording in (b) is not clear. If the Board pays the equivalent of three years' salary to the surviving spouse of an officer killed on duty over a period of three years, the amounts received by the surviving spouse each year will be a "death benefit," and taxed in the manner discussed in the above paragraph. We are not sure what is meant by the clause "in the form of life insurance" if there is in fact no plan of insurance in place to provide for the payment of life insurance benefits in the event of an officer's death while on duty as referred to in this article of the collective agreement. Black's Law Dictionary, sixth edition, defines life insurance as "a contract between the holder of a policy and an insurance company (i.e. the carrier) whereby the company agrees, in return for premium payments, to pay a specified sum (i.e. the face value or maturity value of the policy) to the designated beneficiary upon the death of the insured."

In our conversation of June 16th, you indicated that the employer does not, at this time, provide life insurance coverage solely for the provision of this particular benefit. We would mention that if the employer does pay a premium or otherwise contribute to the provision of life insurance coverage for an employee, that the benefit enjoyed by the employee is taxed under either paragraph 6(1)(a) or subsection 6(4) of the Act. It should be noted that subparagraph 6(1)(a)(i) of the Act specifically excludes from an employee's income the value of a benefit enjoyed or received by that employee which is derived from contributions by an employer under a "group term life insurance policy." However, if the employer acquires a type of insurance, other than of a type specifically exempted under subparagraph 6(1)(a)(i) of the Act, the benefit enjoyed by the employee, which is derived from the employer's contribution, is taxable to the employee under paragraph 6(1)(a). Usually, the value of the benefit is the premium paid by the employer. The tax treatment of contributions by the employer under a "group term life insurance policy," as that term is defined in subsection 248(1) of the Act, is set out in subsection 6(4) of the Act. The calculation of the amount of the benefit to be taxed in the employee's hands is determined by (draft) Part XXVII of the Income Tax Regulations. The Department's publication, "Employer-Provided Group Term Life Insurance," is available at your local tax services office.

We would be pleased to provide you with additional information relating to the provision of life insurance coverage by an employer, or other employee benefits, should you require more detailed information at a later date. We trust our comments will be of assistance to you.

Yours truly,

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

c.c. Serge Brissette

Problem Resolution Program
Ottawa Tax Services Office