Principal Issues: [TaxInterpretations translation] Nature of the mechanism for the purposes of the Income Tax Act, the tax treatment of an employee's contributions to the plan and the tax implications for the employer.
Position: General comments.
Reasons: Not enough information.
XXXXXXXXXX 2011-042039 G. Gladu
February 28, 2012
Dear Sir,
Subject: Death benefits partially funded by employees and retirees
This is in response to your letter of September 7, 2011 in which you requested our comments on the above subject.
All legislative references herein are to the provisions of the Income Tax Act (the “Act").
You have submitted a situation where an employer wants to put in place a mechanism to pay a death benefit to employees or former employees.
You are wondering about the nature of the mechanism for the purposes of the Act as well as the tax treatment of an employee's contributions to the mechanism. You also wish to know the tax implications to the employer.
The situation that you submitted to us appears to be an actual situation for which we cannot give you a definitive opinion. As stated in paragraph 22 of Information Circular 70-6R5 – Advance Income Tax Rulings of May 17, 2002, it is our practice not to issue a written opinion regarding proposed transactions otherwise than by advance rulings.
However, we can offer the following general comments that we hope may be helpful to you.
Our Opinion
Your letter refers to the fact that the benefit to be paid would be a death benefit.
The term “death benefit” is defined in subsection 248(1) and means:
“the total of all amounts received by a taxpayer in a taxation year on or after the death of an employee in recognition of the employee’s service in an office or employment minus…”
A benefit received on the death of a person is not eligible as a death benefit unless it is reasonable to consider that the benefit is paid in recognition of services rendered by that person in connection with an office or employment.
Reasonableness is a question of fact that can only be resolved after a thorough analysis of all relevant facts and documents specific to each situation.
As for the tax consequences to the employee and for the employer, we cannot make a determination because these consequences depend, among other things, on the nature of the mechanism for the purposes of the Act.
Finally, as stated in paragraph 1 of Interpretation Bulletin IT-508-Death Benefits, the Agency accepts 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.
As stated in Information Circular 70-6R5, this opinion does not constitute an advance ruling with respect to income tax and does not bind us.
We hope that our comments will be of assistance.
Best regards,
Michel Lambert, CA, M. Fisc.
Manager
Employment Income Section
Business and Employment Income Division
Income Tax Rulings Directorate
Legislative Policy and
Regulatory Affairs Branch