Principal Issues: [TaxInterpretations translation] Is an amount paid by a union to a member at the time of death a death benefit?
Position: No, it is not a death benefit. It may also be a refund of union dues.
Reasons: In our view, if the amounts are not paid in recognition of the deceased member's services in an office or employment, it cannot be a death benefit. If a member is not deceased, CRA's position in previous interpretations has been that a portion of the amounts received by a living member may be a refund of union contributions paid for the taxation year. Consequently, union contributions repaid in the year would not be deductible. If the amount refunded to a union member in a year is greater than his or her paid dues for the year, the excess must be included in income by virtue of 6(1)(j). We are of the view that this position could apply to a deceased taxpayer if subsection 70(2) applied. On the other hand, we do not have sufficient facts to conclude that the $5,000 could be a payment from a life insurance policy that is generally non-taxable to the person receiving it.
XXXXXXXXXX 2008-027924
March 5, 2009
Dear Madam,
Subject: Death benefit
This is further to your email of May 13, 2008 in which you asked our opinion on the tax treatment of a $5,000 payment made out of a union's overhead expenses upon the death of an active member. More specifically, you asked whether this payment constitutes a death benefit under subsection 248(1) of the Income Tax Act (the "Act"). In the event that the payment is not a death benefit, you wish to know the tax treatment of the payment.
Unless otherwise indicated, all legislative references herein are to the provisions of the Act.
Our Comments
The situation you have indicated in your letter appears to be related to an actual situation, which concerns a specific taxpayer. As explained in Information Circular 70-6R5, it is not the practice of the Directorate to comment on proposed transactions involving specific taxpayers otherwise than in the form of an advance income tax ruling. We are, however, prepared to provide the following general comments which may be of assistance to you. These comments may, however, in certain circumstances, not apply to your particular situation.
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.
In the situation you have submitted to us, you have indicated that there is no employer-employee relationship between the union and its member covered by this program. Thus, since the amount is not paid in recognition of services rendered by a former employee in the course of the employment, we are of the view that the amount paid is not a death benefit as defined in subsection 248(1).
Furthermore, paragraph 6(1)(j) provides that a taxpayer must add to income from an office or employment for a taxation year any amounts received by the taxpayer in that year that were granted or refunded to the taxpayer in respect of amounts that would be deductible by virtue of subsection 8(1). Those amounts must be included in the taxpayer's income to the extent that they were not taken into account in computing an amount deducted by virtue of subsection 8(1) for the year or a preceding taxation year.
Subparagraph 8(1)(i)(iv) provides that amounts paid by the taxpayer in the year to maintain membership in a trade union are deductible in computing the taxpayer's income to the extent that the taxpayer has not been, and is not entitled to be, reimbursed.
Consequently, a taxpayer who receives, in a year, a dues refund that equals or exceeds the taxpayer’s annual dues paid to the union in that year cannot deduct their annual dues from employment income by virtue of paragraph 8(1)(i). In addition, the portion of the refund that exceeds the taxpayer’s annual dues must be added to the taxpayer’s income by virtue of paragraph 6(1)(j).
In the present situation, we believe that if the deceased taxpayer had, at the time of death, rights or things under the applicable contracts, the provisions of subsection 70(2) could apply. Thus, by virtue of this subsection, the value of the rights or things that the deceased had at the time of death must be included in the individual’s income upon the realization or disposition of such rights or property unless the individual’s legal representative elects to file a separate income tax return or subsection 70(3) applies.
Thus, to the extent that subsection 70(2) applies to deceased members who receive the $5,000, it is our view that the tax consequences would be as explained above with respect to union dues.
Finally, it is possible that the amount of $5,000 functions as a payment from a life insurance policy, that is generally non-taxable to the person receiving it. However, for this to be the case in the situation you described, there must be a policyholder who insures a person's life, an insured person and a promise by the insurer to pay a benefit to a beneficiary following the death of the insured person. Given the absence of facts in your request for a technical interpretation to this effect, we are unable to make more specific comments in this regard.
These comments are not advance income tax rulings and are not binding on the CRA in respect of any particular factual situation.
Best regards,
François Bordeleau, LL.B.
Manager
Business and Partnerships Section
Business and Partnerships Division
Income Tax Rulings Directorate.