13 February 1980 Income Tax Severed Letter

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.

A.T. Walsh (613) 593-7295

Feb 13, 1980

XXXX

This is in reply to your letter of January 8, 1980 concerning the income tax implications of a proposed fund to be set up to aid dependents of miners who lost their lives in a mining accident and disabled survivors of the accident.

You outlined the following situation in your letter:

XXXX

In addition, the corporation wishes to create its own fund to assist these victims. While this would be set up right away, company officials consider that in view of the relief provided by the public fund, it would be in the best interests of the beneficiaries if payment to them was deferred for several years.

To establish the fund, XXXX would place a specific amount on deposit for each widow and each child of the deceased man, and an amount for each of the four disabled miners. This amount, plus accumulated income, would be paid to each of the beneficiaries at a stated specified time, not expected to be more than three to five years in the future.

The intention was that the money be placed in a trust, have the income accumulate there, and make the payout at the specified time to each beneficiary. However, the concern arose that the benefits would be diminished because the income earned in the trust would be subject to income tax. To overcome this problem, you suggested that a registered charity within the meaning of subsection 149.1(1) of the Income Tax Act be established.

As an alternative to the establishment of a registered charity you suggested that on the basis that XXXX is an exempt corporation, it could place funds in a separate account and allow the income to accumulate until the date set for distribution.

You indicate that the concerns with this arrangement, which overcomes some of the difficulties, is the tax position of the beneficiaries on distribution, which would include:

(a) Widows (b) Children of the deceased men (c) Four men who are alive but disabled

You requested our opinion on the alternatives outlined above.

Paragraph 3 of Information Circular 77-14 sets out the conditions that an organization must meet in order to qualify for registration as a registered charity. Among the conditions are that the sole purposes and objects of an organisation must be (i) the relief of poverty, (ii) other purposes of a charitable nature beneficial to the community as a whole. In our opinion, the organization which proposes to set up will not qualify under (i) or (ii) above, for registration as a charity because the purpose of its existence is limited to aiding certain specific individuals rather than the public at large.

With respect to your second alternative, we agree with your view that the payments to the widows could qualify as a death benefit even though the amount would be received three to five years after the disaster, but this would not apply to any of the children whose mothers were among the widows, since a death benefit cannot be paid to another person where there is a widow. We also agree with your view that in the case of these children, the amount would not be considered to be income to the children pursuant to paragraph 6(1)(a) because there would be so employer/employee relationship involved. If the amount received by the children is a death benefit, it will be included in their income pursuant to subparagraph 56(1)(a)(iii).

In our opinion, it will be a question of fact whether or not the payments will be death benefits as defined in subsection 248(1) of the Act. In order for the amounts to be considered death benefits they mut be paid in recognition of the deceased employees services to XXXX. In our opinion, a reasonable argument would probably be made in support of the view that the payments will be made in recognition of the needs of the deceased employees families rather than in recognition of the deceased employees services. If this view could be sustained, the payments would be considered as gratuitous payments by XXXX and therefore tax-exempt in the widow's and/or children's hands.

With respect to the four disabled miners, it is our view that it will be a question of fact whether or not subsection 6(1) will apply to the amounts they receive from XXXX. However, it is our view that there is a possibility that the amounts could be considered as gratuitous payments on behalf of XXXX If subsection 6(1) does not apply to the amounts, they will be considered tax- exempt receipts to the recipients, as it is our opinion that paragraph 56(1)(a) will not apply to the payments.

Yours truly,

for Director Non-Corporate Rulings Division