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.