Death Benefit

Under a collective agreement, an employee's sick leave credits (net of days used) are accumulated in a reserve ("Reserve") and, in December of each year, paid out in cash based on any excess over 20 days on September 30 of that year (with the balance carried forward). Would the payout of the balance in the Reserve (not exceeding 20 days and based on the current salary) on the employee's resignation, dismissal, or retirement qualify as a retiring allowance – or as a death benefit if paid on the employee’s death? CRA responded:

[T]he portion of the amount paid… in respect of the maximum…20 ,,, days sick leave in the Reserve at the time of retirement or in respect of the loss of employment may be considered a retiring allowance. ...

In a case where an employee dies while still employed … the portion of the amount paid … in respect of the compensation for the maximum twenty (20) days sick leave in the Reserve would be a death benefit since this portion of the allowance would be paid as a result of the employee's death.

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. Alternatively, the individual received only dividends, without any salary or other remuneration as an employee. Would an amount paid by the corporation on the shareholder’s death qualify as a death benefit? Can authorizing minutes by the board be done after rather than before death? Is there a time limit for paying a death benefit? CRA responded:

In the first situation…[if] a genuine employment relationship existed… over the years and the corporation paid him or her a salary in consideration for his or her services rendered during those years, the failure to pay a wage to the individual during the two years preceding his death would not result in the amount paid by the corporation to the employee not being a death benefit.

…[I]n the second situation…the amount paid is not a death benefit because it is not reasonable to assume that it is paid in recognition of the individual's services, as an employee, rendered in the course of an office or employment. …

After indicating that when the amount was recorded in the minutes did not affect its character, CRA stated that “the payment of the death benefit may be staggered over more than one taxation year.”

A U.S. citizen is resident in Canada and was the beneficiary of a deceased U.S resident who had been a retired member of a U.S. public pension plan. A payment received under the plan by the beneficiary would be of a “superannuation or pension benefit” (includible in income under s. 56(1)(a)(i)) rather than of a “death benefit” (generally includible under s. 56(1)(a)(iii) but subject to a $10,000 exclusion from income).

The former employees and retirees of a bankrupt corporation (the "Employer") received a lump for the cancellation of their rights in a group insurance plan and respecting legal costs incurred to recover the lump sum. The lump sum received for the Plan cancellation included compensation for the loss of medical and dental coverage and hospitalization coverage for themselves and their dependents (respecting the "Medical Plan"), as well as the loss of life insurance coverage (the "Coverage"). Damages also were claimed for the amounts owing under the Employment Standards Act (the "Dismissal Amount").

After finding that the portion of the lump sum allocable to the termination of the Medical Plan was taxable, and in going on to find that that portion allocable to the lost Coverage also was taxable to the recipients, the Directorate first rejected the taxpayers’ (“Objectors’”) submission that such amounts qualified as a “death benefit,” stating:

An amount received may qualify as a "death benefit" within the meaning of subsection 248(1) only if it is received by a taxpayer on or after the death of an employee or former employee. Thus, in applying the surrogatum principle as it is relied on in Tsiaprailis … the portion of the lump sum received by the Objectors for the loss of their Coverage entitlement cannot qualify as a death benefit within the meaning of subsection 248(1) since it is the Former Employees or Retirees who received the benefit. In addition, the indemnity cannot replace a death benefit since people insured under the life insurance policy are still alive.

Rather … the portion of the lump sum that the Opponents received that relates to the Coverage is intended to replace the insurance premiums that the Employer was required to pay under the term life insurance policy to provide life insurance coverage that the Objectors benefited from under the Plan.

Could the number of years between the termination of employment and the death of a former employee prevent an amount received from qualifying as a death benefit? CRA responded:

[T]he passage of time between the termination of an employment and the death of a former employee is not generally a determining factor by itself for disqualifying an amount received as a death benefit.

However, [such] passage of time … may be one of the factors to be considered in determining whether the conditions set out in the definition of death benefit in subsection 248(1) are otherwise satisfied … .

In the course of a general discussion, CRA reaffirmed its position in IT-508, para. 1 “that an amount paid to a former employee may be a death benefit, where all of the conditions set out in the definition of death benefit in subsection 248 (1) are otherwise satisfied.”

Following the termination of a group term life insurance policy for the benefit of retired employees, their former employer (Taxpayerco):

(1) may decide to pay, to the estate of the retiree or specifically designated beneficiaries, an equivalent amount ("lump sum") to the death benefit initially provided for in the abandoned group life insurance policy; or

(2) may decide to pay the lump sum directly to a retiree prior to the retiree’s death.

Respecting the first scenario, CRA stated:

[T]he definition of [death benefit] … is broad enough to include the lump sum that Taxpayerco proposes to pay on the death of a retiree. Such a benefit is to be included in income under subparagraph 56(1)(a)(iii).

Respecting the second scenario, CRA stated:

[A]ny amount paid to a retiree by Taxpayerco should be included in computing the retiree’s income under either section 5 or section 6 … [as] the payment … arises necessarily from the retiree’s employment with Taxpayerco.

An amount can be paid as a death benefit if the deceased employee was, at the time of death, a corporate director.

An individual who had been receiving long-term disability benefits after an illness had prevented continuation of the individual’s employment, brought an action when the insurance company ceased the benefit payments. The action was settled after the individual’s death by payment to the estate of long-term disability benefits that were unpaid during the individual's lifetime, and a survivor's benefit. CRA stated:

If … the survivor's benefit received by the individual's estate is one of the components of the long-term disability insurance plan, it is likely that this benefit would qualify as a "death benefit" … .

… A benefit received as a consequence of the death of a person qualifies as a death benefit if it can reasonably be regarded as being paid in recognition of services rendered by that person in connection with an office or employment.

A union paid $5,000 as an overhead expense to an active member on the member’s death. It was not a death benefit as there was no employer-employee relationship.

Regarding an amount paid following the death of a former employee when the latter had paid an annual premium to be entitled to that death benefit, CCRA indicated that it was received tax free rather than as a taxable death benefit (subject to the deduction) since the benefit was not paid for services rendered by the former employee, who was required to pay a premium for the benefit to be paid following death.

After referring to the “death benefit” definition and to s. 56(1)(a)(iii), CCRA stated:

In a situation where an employer pays the spouse of a deceased employee $10,000 in recognition of the employee's services and no other amount is received in that respect, the spouse will not have to include an amount pursuant to subparagraph 56(1)(a)(iii).

Furthermore, there is no provision under the Act that requires the amount paid by the employer to be otherwise included in computing the income of the deceased employee or of any of the employer's employees.

The reference to an "employee" includes a former employee.

If an individual who died was still an employee, a payment in lieu of accumulated sick leave may be treated as a death benefit. However, if the employee dies after retirement, the payment for accumulated sick leave credits is a retiring allowance.

Where an employer's pension plan carries an insurance policy which pays annuities to the surviving spouse if she has custody of the deceased's children, the annuities will be included in her income.