N.R. Mitchell (613) 957-2134
MAR -3 1988 Dear Sirs:
Re: Enhancement to Survivors' Benefits
This is in reply to your letter of January 25, 1988, in which you request the Department's views on the income tax treatment of enhancements to benefits paid under a group term life insurance policy to survivors of employees. An employer intends to pay a lump sum premium to or under a group term life insurance policy which will retroactively increase the benefit on death being paid to beneficiaries of deceased employees. You have asked for our views on the tax treatment of these premiums and the benefits that these premiums are used to provide,
In our view, premiums paid to fund enhanced benefits payable to the survivors of employees who are already deceased could not be considered insurance premiums. As the "insured" is already dead, the element of risk necessary to a contract of insurance would be absent. Accordingly, such premiums would not give rise to a benefit under subsection 6(4) of the Income Tax Act (the "Act"). The enhanced benefits purchased with these premiums would be taxed in a different manner from those amounts which are in fact the proceeds of group life insurance coverage which was in effect on the life of the employee. The latter amounts would, generally speaking, be a capital receipt and would not be taxable in the hands of the beneficiaries. However, if the proceeds are payable in the form of monthly or other periodic payments to the beneficiary, the beneficiary is considered to have received the proceeds of the life insurance policy in the form of an annuity contract. These would be included in income pursuant to paragraph 56(1)(d) of the Act, subject to a possible deduction for the capital element of the annuity payments - see paragraph 60(a) and Regulation 300. The precise income tax consequences in a particular case would, of course, depend upon the circumstances, particularly the terms of the insurance policy and other relevant documents, as well as the date at which the deceased employee became insured.
On the other hand, the enhanced benefits described in your letter (or the lump sum premium necessary to provide such enhanced benefits if, for example, that premium is used to purchase an annuity) would most likely be taxed in the hands of the beneficiaries in the year of payment as a "death benefit", pursuant to subparagraph 56(1)(a)(iii) of the Act. As provided for in the definition of death benefit in subsection 248(1) of the Act, the first $10,000 of the aggregate of amounts received upon or after the death of an employee in recognition of the employee's service in an office or employment are not included in the recipient's income. If the proceeds of the enhanced benefits are payable in the form of monthly or other periodic income or are used to purchase an annuity, the amounts received by the beneficiary would be included in income pursuant to paragraph 56(1)(d) of the Act. This inclusion in income would be subject to a possible deduction of the capital element of the annuity payment (including amounts previously brought into income) pursuant to paragraph 60(a) and Regulation 300. Once again, the actual treatment for income tax purposes would depend upon the circumstances in each case.
On the assumption that the cost of the premium described above was incurred by the employer as an expense to earn income, we would also agree that these amounts would be deductible in the year of payment by the employer pursuant to paragraph 18(1)(a)of the Act.
We trust this information will be of assistance.
Yours truly,
ORIGINAL SIGNED BY
for Director Small Business and General Division Specialty Rulings Directorate Legislative and Intergovernmental Affairs Branch