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

Principal Issues: 1) Does the fact that a corporation has paid salary to the deceased sole shareholders for many tax years, but only dividends for the past two tax years affect the characterization of a payment as a death benefit? 2) Would the response in 1) be different if the deceased only received dividends and never received any remuneration/salary from the corporation? 3) Whether the minutes of a meeting of the directors of the corporation providing for the payment of a death benefit to the sole shareholder need to be done prior to his/her death? 4) Whether there is a time limit within which a payment to a taxpayer must be made?

Position: 1) It is a question of fact but the fact that the corporation only paid dividends for the past two tax years prior to the individual's death does not, in and of itself, preclude the amount from qualifying as a death benefit. 2) Question of fact, but it does not seem reasonable to conclude that an amount paid would be in recognition of the deceased service in an office or employment. 3) We accept that a payment to the taxpayer may be a death benefit where all requirements in the definition of death benefit are satisfied. There is no obligation to have the minutes providing the payment of a death benefit before or after the death of the employee.
4) There is no time limit to pay a death benefit.

Reasons: 1) and 2) Definitions of death benefit, office and employee at paragraph 248(1). 3) Definition of death benefit. 4) Definition of death benefit at paragraph 248(1). Paragraph 14 of Interpretation Bulletin IT-508R.

XXXXXXXXXX							2016-065610
								Lucie Allaire, LL.B
								CPA, CGA, D. Fisc
March 14, 2017

Dear Madam,

Subject: Death benefit

This letter is in response to your letter of June 20, 2016 in which you inquired inter alia as to whether an amount paid by a corporation may in certain circumstances qualify as a "death benefit" within the meaning of the definition of "death benefit" under subsection 248(1) of the Income Tax Act (the "Act").

More specifically, you described a situation where 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. You also described another situation whereby the individual received only dividends, without any salary or other remuneration as an employee. In both cases, you wish to know whether an amount paid by the corporation on the death of the shareholder qualifies as a death benefit and could be excluded from the income of the taxpayer who receives it.

You also asked whether minutes from a meeting of the board of directors of the corporation providing for the payment of a benefit following the death of the sole shareholder must be done before death or if they can be done after the death.

Finally, you wish to know whether there is a time limit for paying a death benefit as defined in subsection 248(1) to a taxpayer.

Unless otherwise indicated, all legislative references are references to the provisions of the Act.

Our Comments

This technical interpretation provides general comments on the provisions of the Act and related legislation, where referenced. It does not confirm the income tax treatment of a particular situation involving a specific taxpayer but is intended to assist you in making that determination. The income tax treatment of particular transactions proposed by a specific taxpayer will only be confirmed by this Directorate in the context of an advance income tax ruling request submitted in the manner set out in Information Circular IC 70-6R7, Advance Income Tax Rulings and Technical Interpretations.

The term "death benefit" is defined in subsection 248(1) ("Definition") and includes:

[T]he 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 (footnote 1)

A benefit received on the death of a person is not eligible as a death benefit unless it can reasonably be considered that the benefit is paid in recognition of an employee's services rendered in the course of an office or employment.

Whether it is reasonable to consider that an amount is paid in recognition of services rendered in the course of an office or employment is a question of fact which cannot be resolved until after a full analysis of all relevant facts and documents specific to each situation.

In the first situation submitted, to the extent that a genuine employment relationship existed between the deceased individual and the corporation over the years and the corporation paid to him or her a salary in consideration for his or her services rendered during those years, the failure to pay remuneration to the individual during the two years preceding his or her death would not result in the amount paid by the corporation to the employee not being a death benefit.

In contrast, in the second situation you described, the amount paid is not a death benefit because it is not reasonable to consider that it is paid in recognition of the individual's services, as an employee, rendered in the course of an office or employment. In our view, the individual was not entitled to any salary or other remuneration for services that he or she would have rendered in the course of an office or employment if the corporation had paid him or her only dividends. A dividend is a payment in the form of a right that a person holds to share in the capital of a corporation, and not compensation for services rendered in the course of an office or employment.

Furthermore, whether or not the sum to be paid is recorded in the minutes of a meeting held prior to or after the death of an employee does not determine, in and of itself, whether it constitutes a death benefit.

Finally, under paragraph 14 of Interpretation Bulletin IT-508R - ARCHIVED - Death Benefits, the payment of the death benefit may be staggered over more than one taxation year.

We hope that our comments will be of assistance.

Louise J. Roy, CPA, CGA
Manager
Financial Industries and Trusts Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch

FOOTNOTES

Due to our system requirements, footnotes contained in the original document are reproduced below:

1 An amount of up to $10,000 may reduce the amount of the post-death benefit.