Written on February 8, 2011 – 7:00 am | by Steven Frye
A death benefit is an amount you receive after a person’s death in recognition the deceased person’s employment service.
How does it get taxed?
The general rule is the first $10,000 is exempt from tax. The recipient of the death benefit reports the excess of the amount actually received less $10,000 on their tax return. For example, if the amount received is $20,000, then the amount reported is $10,000 ($20,000 less $10,000). If the recipient is the beneficiary of the payment e.g. spouse, common law partner, then the beneficiary would report the $10,000 on their tax return. If the beneficiary is the estate of the deceased employee, then the estate reports the $10,000. In the instance where there is no named beneficiary, the estate would also report the amount.
If there is more than one named beneficiary, then the $10,000 exemption would be shared between beneficiaries based on their allocated amount as a % of the total amount paid. For example, if there are 4 beneficiaries being allocated $5,000 each out of a total of $20,000, then each beneficiary would claim ¼ ($5,000/$20,000) of the $10,000 exemption or $2,500.
Please note the CPP death benefit of $2,500 which is payable to the beneficiaries of most deceased taxpayers in Canada does not have an exemption associated with it. It is reported in its entirety by the recipient, being the estate of the deceased taxpayer or the named beneficiary of the benefit.