“Tax-free payments are permitted in certain situations..”
There are few types of income which escape the grasp of our tax collectors, but death benefits can be one of them.
As a general rule, $10,000 of death benefit can be paid tax-free by an employer to the spouse or other beneficiaries of a deceased employee. Where the recipient is the employee’s surviving spouse, the exempt portion is the first $10,000 of the benefit.
Where more than one taxpayer other than a surviving spouse receive benefits in respect of an employee, the $10,000 exempt portion is also apportioned among them, based on the amount received by each of them. The maximum benefit is $10,000 and is available to other taxpayers only to the extent it is not utilized by the surviving spouse. Therefore, if an amount is deducted by another taxpayer in a taxation year, this taxpayer will be required to revise the claim if in a subsequent year the surviving spouse receives an additional amount such that the total claim exceeds $10,000.
To ensure the deductibility of the death benefit, it may be prudent for the employer to put documentation in place that indicates that a death benefit will be paid to a specific employee upon his or her death.
TAX TIP OF THE WEEK is provided as a free service to clients and friends of the Tax Specialist Group member firms. The Tax Specialist Group is a national affiliation of firms who specialize in providing tax consulting services to other professionals, businesses and high net worth individuals on Canadian and international tax matters and tax disputes.
The material provided in Tax Tip of the Week is believed to be accurate and reliable as of the date it is written. Tax laws are complex and are subject to frequent change. Professional advice should always be sought before implementing any tax planning arrangements. Neither the Tax Specialist Group nor any member firm can accept any liability for the tax consequences that may result from acting based on the contents hereof.