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M.S. Lalonde (613) 957-8959
October 31, 1986
Dear Sirs:
This is in reply to your letter of September 24, 1986, in which you have requested our views with respect to the taxation of a severance payment.
By definition, severance pay is an entitlement payable to eligible employees upon cessation of employment. This entitlement is payable to employees, or their estate, in such cases as resignation, retirement, death, release for incompetence or incapacity, rejection on probation and others as may be applicable.
Where the employee died while still employed, the severance pay constitutes a death benefit. Pursuant to subsection 248(1) of the Income Tax Act ("the Act") where the surviving spouse receives the death benefit, the amount to be included in income by virtue of subparagraph 56(1)(a)(iii) of the Act is the aggregate of amounts received upon or after the death of the employee in excess of $10,000. Where the death benefit is received by a trust or other beneficiaries the amount to be included in income will be reduced by the difference between $10,000 and the amount received by the surviving spouse shared among them on a proportionate basis.
Where an employee ceased employment but died before the severance pay was received, the subsequent payment of the amount to a dependant, relation or legal representative will be included in the recipient's income as a retiring allowance pursuant to subparagraph 56(1)(a)(ii) of the Act. As such the payment will qualify for a deduction under paragraph 60(j.1) of the Act where the recipient is a dependant or relative, or in the case of a trust where the amount may reasonably be considered to be paid or payable at a particular time to an individual beneficiary of the trust.
We hope the above comments are of assistance to you.
Yours truly,
for Director Financial Industries Division Rulings Directorate Legislative and Intergovernmental Affairs Branch