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.
For further information see Video Tax News Monthly Tax Update Newsletter, Issue No. 430