16 February 1999 External T.I. 9901615 - 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: An individual is the sole shareholder and officer of an investment company. Since he did not require additional funds over the years, he did not take any salary or other remuneration from the company. There is no obligation for the company to pay any retiring allowance. The individual dies and the company would like to pay a death benefit to his widow in recognition of his years of service as an officer. Does the fact that the company never paid any salary or remuneration to the officer affect the characterization of the payment to his widow? Would the amount the company pays to the widow be considered a death benefit?

Position: Question of fact whether the shareholder was also an employee of the company.

Reasons: See Q.13 of file # 5-2830 and IT-508R, Death Benefits.

Subsection 248(1) of the Act defines death benefits. In general, a death benefit means the total amount received by any taxpayer in a taxation year on or after the death of an employee in recognition of that employee's service in an office or employment less an amount of up to $10,000 and is included in the recipient's income under subparagraph 56(1)(a)(iii) of the Act. "Office" , as defined in subsection 248(1) of the Act means the position of an individual entitling the individual to a fixed or ascertainable stipend or remuneration and includes the position of a corporation director. "Officer" means a person holding such an office. "Employee" as defined in subsection 248(1) of the Act, includes an officer. The above-mentioned definition of "office" refers to the entitlement of an individual to a fixed or ascertainable stipend or remuneration but there is no requirement in that definition that the individual has to receive or has to be paid the stipend or remuneration. However, whether or not a deceased taxpayer was an employee of a particular company is a question of fact.

XXXXXXXXXX 5-990161
G. Moore
February 16, 1999

Dear XXXXXXXXXX:

Re: Death Benefits

This is in reply to your letter of January 20, 1999, in which you requested our comments regarding the following hypothetical situation:

An individual is a resident for Canadian tax purposes. He is the sole shareholder and officer of an investment company. Since he did not require additional funds over the years, he did not take any salary or other remuneration from the company. There is no obligation for the company to pay any retiring allowance. The individual dies and the company would like to pay a death benefit in recognition of his years of service as an officer. The deceased has a surviving spouse who is also resident for tax purposes. If the death benefit is paid to the surviving spouse, she will avail herself of the $10,000 exemption granted for death benefits. Given these circumstances, you are asking if the amount the company pays would be considered a death benefit and if it would be acceptable for the company to pay an amount that is equal to the $10,000 exemption. You have indicated that you do not believe that the fact that the officer/shareholder never took a salary should impact on the characterization of the payment. You are also asking if the problem would have been resolved if the company had paid some salary.

Our Comments

Subsection 248(1) of the Income Tax Act ("the Act") defines death benefits. In general, a death benefit means the total amount received by any taxpayer in a taxation year on or after the death of an employee in recognition of that employee's service in an office or employment less an amount of up to $10,000 and is included in the recipient's income under subparagraph 56(1)(a)(iii) of the Act. If the sole surviving spouse is the only person to receive a death benefit, the spouse is required to include in income, the amount of the death benefit received, minus the lesser of the total of such amounts received by the surviving spouse and $10,000. Death benefits are discussed in more detail in IT-508R, Death Benefits (copy enclosed).

"Office", as defined in subsection 248(1) of the Act means the position of an individual entitling the individual to a fixed or ascertainable stipend or remuneration and includes the position of a corporation director. "Officer" means a person holding such an office. "Employee", as defined in subsection 248(1) of the Act, includes an officer. "Employment", as defined in subsection 248(1) of the Act, means the position of an individual in the service of some other person. The above-mentioned definition of "office" refers to the entitlement of an individual to a fixed or ascertainable stipend or remuneration but there is no requirement in that definition that the individual has to be paid the stipend or remuneration. However, whether or not a deceased taxpayer was an employee of a particular company is a question of fact and accordingly, we cannot comment on whether the individual in the above-mentioned hypothetical situation would be considered to be an employee of the company. A benefit received on the death of an employee will not qualify as a death benefit unless it is reasonable to conclude that the benefit is in recognition of the employee's service in an office or employment. If no employer-employee relationship existed, the amount received by a beneficiary of the deceased will not be treated as a death benefit.

If we assume that the deceased taxpayer was in fact an employee of the corporation and not just its sole shareholder, a payment to his widow could be taxable as ordinary income (i.e., deferred compensation), a retiring allowance or a death benefit. With regard to the distinction between deferred compensation and a retiring allowance, we refer you to paragraph 7 of Interpretation Bulletin IT-337R3, Retiring Allowances (copy enclosed). You had mentioned that there is no obligation for the corporation to pay any retiring allowance. If an employee dies prior to retirement, a payment (which is not deferred compensation) to a spouse or other dependent in recognition of the employee's service will generally be considered a death benefit. If an employee dies after retirement and his or her spouse then receives such a payment in recognition of the employee's service, this payment would normally be considered to be a retiring allowance. In a closely held corporation, the amounts of such payments (which are not deferred compensation) must be reasonable. We note that it may not be reasonable to conclude that a payment on death is in recognition of an employee's service when the service was not recognized by a salary during the individual's lifetime.

We trust our comments will be of assistance to you.

Yours truly,

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

Encl: