paying a death benefit to a deceased owner-manager

In a March 14, 2017 Technical Interpretation (2016-0656101E5, Allaire, Lucie, LL.B., CPA, CGA, D. Fisc), CRA addressed several questions related to payments from a corporation following the death of an owner-manager. A death benefit is a payment received subsequent to the death of an employee, in recognition of the deceased employee’s services (Subsection 248(1)). Up to $10,000 received by the Estate or beneficiaries of the deceased as a death benefit can be received on a tax-free basis. As an employment-related cost, this would generally be deductible to the payer.

CRA noted that the determination of whether an individual is an employee is a question of fact. The fact that an owner-manager who received salaries for several years was only paid dividends in the two years prior to death would not automatically mean no death benefit could be received. It would be more difficult to support an employment relationship where the individual never received employment income from the corporation.

The existence of a formal commitment, such as a contract or a Directors’ Resolution, prior to the date of death is not a requirement for an amount to be a death benefit. Finally, as discussed in Paragraph 14 of IT-508R, Death Benefits (Archived), a death benefit could be paid out over time, but the $10,000 exclusion applies only once, not once for each year.