ARCHIVED - Death Benefits

From: Canada Revenue Agency

Death Benefits

NO.:   IT-508R        DATE:      February 12, 1996
SUBJECT:       INCOME TAX ACT              
Death Benefits
REFERENCE:   Subparagraph 56(1)(a)(iii) and the definition of "death benefit" in subsection 248(1) (Also subsections 104(28) and 252(4), the definitions of "retiring allowance," and "superannuation or pension benefit" in subsection 248(1), and subparagraph 56(1)(a)(ii))


Application

This bulletin cancels and replaces IT-508, Death Benefits -- Calculation, dated June 30, 1987. It also cancels IT-301, Death Benefits -- Qualifying Payments, dated April 6, 1976.

Summary

The purpose of the legislative provisions regarding death benefits is:

  • to ensure that amounts received as death benefits are included in the recipient's income; and
  • to allow an exclusion from income for up to $10,000 of the gross amount of death benefits attributable to a deceased taxpayer's service in an office or employment.

This bulletin discusses some of the types of payments which qualify as the gross amount of a  death benefit. The calculation of a death benefit is also explained in situations where qualifying payments are made over more than one taxation year or received from more than one office or employment.

Discussion and Interpretation

General

¶ 1. In this bulletin, the term "gross amount" of a death benefit means the amount or amounts received by any taxpayer in a taxation year upon or after the death of an employee or former employee in recognition of that employee's or former employee's service in an office or employment.

In general terms, a "death benefit" is the gross amount received by a taxpayer in a taxation year less an amount of up to $10,000 (see ¶s 9 to 12 below) and is included in the recipient's income under subparagraph 56(1)(a)(iii).

As decided by the Tax Court of Canada in Gesina Hiltemann v. The Queen ([1986] 2 C.T.C. 2279, 86 DTC 1716), generally, the value of a benefit conferred on a taxpayer after the death of an employee or former employee, as a consequence of the employment relationship, is considered to be the gross amount of a death benefit. However, this does not apply to non-qualifying payments, as noted in ¶ 4 below.

¶ 2. Since there is no requirement that the payer be the employer, an amount received or receivable from a testamentary trust qualifies as the gross amount of a death benefit, if the payment received by the trust on or after the death of the employee is in recognition of the employee's service in an office or employment. Under subsection 104(28), if the gross amount of a death benefit received by a testamentary trust is paid or to be paid to a beneficiary of the trust, the amount is deemed to have been received by the beneficiary (and not received by the trust).

Qualifying Payments

¶ 3. The following payments are considered to be the gross amount of a death benefit:

  • payments in recognition of the employee's service even though the payments continue for a long time on a periodic basis, or for the lifetime of the recipient, if they were made under an employer's fund or plan that is distinctly separate from certain plans such as a superannuation or pension fund or plan, a salary deferral arrangement, or a retirement compensation arrangement; and
  • payments in recognition of service of an employee who dies prior to retirement that represent a settlement of his or her accumulated sick leave credits to which the employee was entitled under the terms of the office or employment.

Non-Qualifying Payments

¶ 4. The following payments are not considered death benefits:

  • a payment received out of a superannuation or pension fund or plan, and in general, payments received out of a salary deferral arrangement, or a retirement compensation arrangement upon or after the death of an officer or employee;
  • where an employee dies prior to retirement, a payment in respect of accumulated vacation leave;
  • a death benefit paid under the Canada or Quebec Pension Plan;
  • a payment representing deferred employment income that would have been taxable in the employee's hands under subsection 6(3) if the employee had not died; and
  • a payment representing overtime pay that would have been taxable to the employee under subsection 5(1) if the employee had received the amount before death.

¶ 5. If an employee ceased employment and was entitled to receive a retiring allowance (see the definition of retiring allowance in subsection 248(1)) but dies before the payment is made, the subsequent payment of the amount to a beneficiary of the deceased is included in the recipient's income under sub-paragraph 56(1)(a)(ii) as a retiring allowance. The tax treatment of a retiring allowance is discussed in the current version of Interpretation Bulletin IT-337, Retiring Allowances.

If an employee dies while still employed by the employer, and that employee was contractually entitled to receive a retiring allowance upon retirement, the severance pay received by a beneficiary of the deceased, on or after the death of that employee, qualifies as the gross amount of a death benefit.

¶ 6. A benefit received on the death of an individual will not qualify as a death benefit unless it is reasonable to conclude that the benefit is in recognition of that individual'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. Notwithstanding the existence of an employer-employee relationship, generally, amounts received out of or under a salary deferral arrangement, or a retirement compensation arrangement, do not qualify as death benefits.

Public Servants of the Federal Government

¶ 7. Under Part II of the Public Service Superannuation Act, public servants of the Federal Government make contributions to the Public Service "Supplementary Death Benefit" Plan for which a specific account is established separate from the Superannuation Plan. Since this plan is in substance a group term life insurance plan, contributions thereto are not deductible in computing income nor are the benefits payable considered income as death benefits or otherwise.

Superannuation or Pension Benefit

¶ 8. As provided in subsection 248(1), a "superannuation or pension benefit" includes any amount received out of or under a superannuation or pension fund or plan. This specific provision is considered to override the death benefit definition; thus payments from such funds or plans cannot qualify as death benefits in any circumstances.

CALCULATION OF DEATH BENEFIT

Qualifying Payment Received After 1992

Sole Beneficiary Is Spouse

¶ 9. For 1993 and later taxation years, if a gross amount of a death benefit is received by a taxpayer who is the only person who both:

  • has received such an amount; and
  • is a "surviving spouse" (see ¶ 11 below) of the employee,

paragraph (a) of the death benefit definition provides that the reduction allowed in computing the death benefit is the lesser of:

  • the gross amount received in the year by the surviving spouse; and
  • the amount, if any, by which $10,000 exceeds the total gross amounts received in prior years by the surviving spouse.

Sole Beneficiary Is Not Spouse

¶ 10. If only one person (ex. a child of the deceased employee) receives a gross amount of a death benefit, and that person is not a surviving spouse of the deceased employee, paragraph (b) of the death benefit definition applies. Since the $10,000 exemption does not have to be apportioned to any other recipient, the calculation of the reduction would be the same as that shown in 9 above for a surviving spouse, except that the gross amount received by the recipient who is not the surviving spouse, would be substituted in the calculation.

If more than one person receives a gross amount in respect of the same deceased employee, the apportionment rule (see ¶s 12 and 13 below) applies.

Meaning of "Spouse"

¶ 11. In general, before 1993, the "spouse" of a taxpayer was a person of the opposite sex to whom the taxpayer was legally married. For 1993 and later years, since the extended definition of "spouse" in subsection 252(4) includes certain common-law spouses, it is possible that a death benefit can be paid to more than one individual who, for the purpose of that subsection, is considered to be a spouse of the deceased employee.

For the purpose of the death benefit definition, a person is considered a "surviving spouse" of the deceased employee, only if that person is an individual who:

  • is a "spouse" of the deceased employee; and
  • is the only spouse who has received a gross amount of a death benefit in respect of the employee.

More Than One Spouse Is a Beneficiary

¶ 12. In a situation where more than one spouse has received a gross amount, the calculation of the reduction from the gross amount of the death benefit received for each spouse would fall under paragraph (b) of the death benefit definition (see ¶ 13 below). In other words, the $10,000 exempt portion of the death benefit is divided between the spouses, in proportion to the amount each spouse receives. However, note that the total exempt portion of the death benefit for the spouses cannot exceed $10,000.

If a gross amount of a death benefit is paid to:

  • two or more individuals who are considered to be spouses of the deceased employee; and
  • to an individual other than a spouse,

paragraph (b) of the death benefit definition applies and the $10,000 exemption is divided between the recipients in proportion to the amount each received.

Beneficiaries Are Spouse and a Person Other Than a Spouse

¶ 13. If a gross amount is received by a taxpayer who is not the "spouse" (ex. a child of the deceased employee), and there is also only one spouse who is in receipt of a gross amount of a death benefit, paragraph (a) of the death benefit definition applies (see ¶ 9 above) to the "surviving spouse" and paragraph (b) of the death benefit definition provides that the reduction available to the other beneficiary is limited to the excess of $10,000 over the total gross amounts received by the "surviving spouse" in any taxation year. The allowable reduction to the other beneficiary is the lesser of:

  • the gross amount received in the year by the taxpayer, and 
  • the amount determined using the formula: 
        B    
A × ---
         C
    where:
    A = $10,000 minus the total gross amount received by the "surviving spouse";
    B = the gross amount received by the taxpayer; and
    C = the total of all gross amounts received at any time by all taxpayers other than the surviving spouse."

See the example in ¶ 16 below for the calculation of death benefits paid to both the surviving spouse and a beneficiary other than the spouse (ex. the child of the deceased employee).

Death Benefit Paid Over More Than One Taxation Year

¶ 14. If the death benefit is paid over more than one taxation year, and the total gross amount paid to all of the taxpayers in the taxation year is less than the $10,000 exempt portion, the difference can be applied against the following years' payments, to the extent that there is any left.

If gross amounts are received in more than one year as a consequence of a death, it may be necessary to reassess the income tax returns of individuals who received gross amounts in earlier years in respect of the death to reflect the effect, on the reductions available in the earlier years, of the amounts received in the later years. See the example in ¶ 16 below.

Death Benefit Received From More Than One Office or Employment

¶ 15. If gross amounts are received from more than one office or employment by any recipient, the gross amounts received in each year by each recipient are totalled and this total amount is used in the calculation of the allowable reduction as described in ¶s 9 and 13 above. In other words, $10,000 is the maximum amount that can be excluded from income under paragraphs (a) and (b) of the death benefit definition in respect of qualifying payments (see ¶ 3 above) from all sources received by the surviving spouse or other beneficiaries of a deceased employee in recognition of the employee's service from an office or employment.

Example

¶ 16. The following example shows the calculation of the death benefit for a surviving spouse and a taxpayer who is not a surviving spouse.

A surviving spouse and a child of a deceased employee receive gross amounts of $5,000 and $4,000, respectively, which are qualifying payments (see ¶ 3 above) from employment X during year 1. In year 2, the surviving spouse receives a gross amount of $3,500 from employment Y. As a result, the child's income tax return for year 1 has to be reassessed to reduce the reduction allowable to the child as a consequence of the payment of $3,500 to the surviving spouse in year 2. The surviving spouse and child are allowed the maximum reduction available under the death benefit definition in years 1 and 2.

Calculation of reductions:

Year 1

Surviving Spouse:

The lesser of:

  • the amount received in year 1 = $5,000; and
  • $10,000 minus the gross amounts received in previous years ($0) = $10,000.

In year 1, the exempt portion of the gross amount of the death benefit is $5,000. The death benefit required to be included in the income of the surviving spouse for year 1 is $0.

Child:

The lesser of:

  • the amount received in year 1
= $4,000; and
  • the excess                     
    ($10,000 - $5,000)    
  
×
$4,000
---------
$4,000
  
= $5,000

In year 1, the exempt portion of the gross amount of the death benefit is $4,000. The death benefit required to be included in the income of the child for year 1 is $0.

Year 2:

The surviving spouse receives a gross amount of $3,500 from employment Y. The calculation of the reduction for year 2 is as follows:

Surviving Spouse:

The lesser of:

  • the amount received in year 2 = $3,500; and
  • $10,000 minus the gross amounts received by the spouse in prior years ($10,000 - $5,000 received in year 1) = $5,000.

In year 2, the exempt portion of the gross amount of the death benefit for the spouse is $3,500. The spouse does not include any death benefit on his or her income tax return for year 2.

Child:

However, the child's income tax return for year 1 would have to be reassessed to reduce the reduction allowable to the child as a consequence of the payment of $3,500 to the surviving spouse in year 2.

The revised maximum reduction available to the child in year 1 would be the lesser of:

  • the amount received by the child in year 1   
= $4,000; and
  • the excess ($10,000 - $8,500 received by the spouse in years 1 and 2)   
  
×
$4,000
---------
$4,000
  
= $1,500

The child's revised exempt portion of the gross amount for year 1 would be $1,500. Therefore, the child includes a death benefit of $2,500 ($4,000 gross amount - $1,500 exempt amount) in income in year 1.


Explanation of Changes

Introduction

The purpose of the Explanation of Changes is to give the reasons for the revisions to an interpretation bulletin. It outlines revisions that we have made as a result of changes to the law, as well as changes reflecting new or revised departmental interpretations.

Overview

This bulletin deals with the calculation of the amounts subject to tax which a taxpayer may receive after the death of an employee in recognition of the employee's service in an office or employment.

The revision of IT-508 was undertaken primarily to reflect an amendment to the Income Tax Act by S.C. 1994, c. 7 (former Bill C-92). It was also revised to reflect changes to the Income Tax Act by S.C. 1983 c.140 (former Bill C-139) and S.C. 1994 c.21 (formerly Bill C-27).

This bulletin cancels and replaces IT-508, Death Benefits -- Calculation, dated June 30, 1987. The comments on death benefits contained in Interpretation Bulletin IT-301 are incorporated into this bulletin, and consequently, IT-301 has been cancelled.

The contents of this bulletin are not affected by any draft legislation released before December 11, 1995.

Legislative and Other Changes

¶ 1 (replaces former ¶s 1 and 2) defines the term "gross amount" of a death benefit for the purposes of this bulletin. It also outlines the definition of "death benefit" in subsection 248(1), which was amended for 1993 and later years.

New ¶ 2 incorporates some of the comments from former ¶ 1 and also discusses the provisions of subsection 104(28) regarding a gross amount of a death benefit received by a testamentary trust.

New ¶ 3 incorporates the comments in former ¶ 2 of IT-301 regarding qualifying payments.

New ¶ 4 reflects the discussion of non-qualifying payments in former ¶ 3 of IT-301. It also elaborates on other types of payments which are non-qualifying payments.

New ¶ 5 briefly discusses the principal difference between a retiring allowance and a death benefit.

New ¶ 6 outlines the requirement for the existence of an employee-employer relationship in the determination of whether a payment qualifies as a gross amount of a death benefit.

New ¶ 7 incorporates the comments set out in former ¶ 5 of IT-301, concerning death benefits paid to public servants of the federal government.

New ¶ 8 incorporates the explanation regarding superannuation or pension benefits in former ¶ 6 of IT-301.

New ¶ 9 (replaces former ¶ 3) outlines the amendment to the death benefit definition, applicable after 1992, as a consequence of the addition of the extended meaning of "spouse" in subsection 252(4), applicable after 1992.  

New ¶ 10 explains the calculation of a death benefit when the only individual who has received a qualifying payment is an individual other than the spouse, such as the deceased employee's child.

New ¶ 11 briefly discusses the addition of the extended meaning of "spouse" in subsection 252(4), applicable after 1992, and the meaning of "surviving spouse" in the death benefit definition.  

New ¶ 12 explains the calculation of the death benefit where a qualifying payment has been paid to more than one individual who is considered to be a "spouse" of an employee at the time of death.

¶ 13 (replaces former ¶ 4) relates to the calculation of the death benefit where qualifying payments have been made to a sole surviving spouse and to a beneficiary other than a spouse such as the deceased employee's child.

New ¶ 14 explains how the death benefit is calculated if it is paid over more than one taxation year.

¶ 15 replaces former ¶ 5.

New ¶ 16 contains an example of a situation relating to ¶ 13.

Former ¶ 4 of IT-301, which discussed the deduction for death benefits used to purchase an income-averaging annuity contract (IAAC), is no longer applicable. The addition of the definition of "qualifying payment" in former paragraph 61(4)(c), for purposes of an IAAC, effectively terminated the deduction available under subsection 61(1) for single payments, such as death benefits, paid after November 12, 1981, in consideration for an IAAC, since a "qualifying payment" generally only includes a single payment made before November 13, 1981.


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Interpretation bulletins (ITs) provide Revenue Canada's technical interpretations of income tax law. Due to their technical nature, ITs are used primarily by departmental staff, tax specialists, and other individuals who have an interest in tax matters. For those readers who prefer a less technical explanation of the law, the Department offers other publications, such as tax guides and pamphlets.

While the ITs do not have the force of law, they can generally be relied upon as reflecting the Department's interpretation of the law to be applied on a consistent basis by departmental staff. In cases where an IT has not yet been revised to reflect legislative changes, readers should refer to the amended legislation and its effective date. Similarly, court decisions subsequent to the date of the IT should be considered when determining the relevancy of the comments in the IT.

An interpretation described in an IT applies as of the date the IT is published, unless otherwise specified. When there is a change in a previous interpretation and the change is beneficial to taxpayers, it is usually effective for all future assessments and reassessments. If the change is not favourable to taxpayers, it will normally be effective for the current and subsequent taxation years or for transactions entered into after the date of the IT.

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Director, Business and Publications Division
Income Tax Rulings Directorate
Policy and Legislation Branch
Revenue Canada
Ottawa ON K1A 0L5

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