A death benefit is an amount received after a person’s death for their employment service. In general, any amount up to $10,000 received is not subject to tax, pursuant to regulations contained in the Income Act (“ITA”).
What if the deceased was the sole shareholder of a corporation and received a death benefit?
Recently, the Canada Revenue Agency (“CRA”) was asked to consider two scenarios:
1. The sole individual shareholder of a corporation received a salary for many years from the corporation but only dividends for the last two years before his death.
2. The sole individual shareholder received only dividends and no salary during those years.
The CRA was asked:
• If an amount paid by the corporation after the individual’s death was a death benefit and thus subject to the $10,000 exemption.
• If the payment of the death benefit had to be included in the board of directors’ minutes before the individuals’ death or if this could done after his death.
• If there was a time limit to pay the death benefit.
On the basis that a salary is generally considered a payment in respect of a service and a dividend is a payment on account of a shareholding, the CRA confirmed that:
• Provided there was a history of an employer-employee relationship between the corporation and the individual for many years and the corporation paid a salary, the fact that the deceased did not receive a salary in the last two years before death would not affect the death benefit status of the payment.
• If there was no history of an employer-employee relationship between the corporation and the individual such that no salary was ever paid by the corporation to the individual during those years, a payment made by the corporation after the individual’s death will not qualify as a death benefit.
The CRA indicated that the timing of the inclusion in the board of directors’ minutes of a payment made after the individual’s death should not affect the tax treatment of the payment as a death benefit. The application of the payment to the definition of a death benefit under the ITA would be the deciding factor.
The CRA further indicated that there is no time limit on the payment of a “death benefit” that could be spread out over several taxation years following the individual’s death.