16 January 1997 Income Tax Severed Letter 9635791 - DEATH BENEFIT PLAN

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.

DOCUMENT TYPE:

Statement of Principal Issues - 963579

Principal Issues:

Whether death benefit plan is employee benefit plan or what other tax consequences might occur re earnings and contributions from and payments to employers; whether "death benefit" can be paid on death of spouse of employee.

Position:

Not an EBP and no tax consequences; can be a "death benefit" if spouse predeceased by employee.

Reasons:

See document.

ISSUES:

1)Whether the Death Benefit Plan (the "Plan") under which no employee or former employee (and no person who does not deal at arm's length with an employee or former employee) has any rights is an "employee benefit plan" as defined in subsection 248(1) of the Income Tax Act (the "Act");

2)Whether earnings of plan are taxable;

3)Whether a "death benefit" as defined in subsection 248(1) of the Act can be paid with respect to the death of a retired employee.

4)What are tax consequences when payment received from employer on death of spouse.

CONCLUSION:

1)No;

2)No;

3)Yes;

4)If spouse predeceases employee, section 5/6 benefit to employee; if employee predeceases spouse, "death benefit" to recipients to extent $10,000 exhausted on benefit(s) paid on death of employee and on death of spouse.

FACTS:

The XXXXXXXXXX has a number XXXXXXXXXX and other divisions (the "employers") who employ individuals. The XXXXXXXXXX will establish the Plan on the following terms:

1.Each employer must sign an application to become a Participating Employer under the Plan.

2.The Pension Committee (the "Committee") of the XXXXXXXXXX will administer the Plan and appoints its Director of Pensions as the Administrator.

3.Certain employees of the XXXXXXXXXX and of the employers are considered "Eligible Persons" covered under the Plan; there are four categories of "Eligible Persons" those being a) active and disabled employees of a Participating Employer who are covered by the Participating Employer's Basic Group Life Plan (PEBGLP), b) retired employees who have an unreduced pension from the XXXXXXXXXX pension plan and were covered by the PEBGLP, c) spouses of retired employees or deceased retired employees covered under b, and d) retired employees (and their spouses) who retired with a reduced pension from the XXXXXXXXXX pension plan and were covered by the PEBGLP.

4.Employers make monthly contributions to the Plan in respect of their Eligible Persons at rates determined by the Committee from time to time (based on an appropriate actuarial basis).

5.All contributions together with investment earnings and capital are held by the Administrator; the Administrator will enter into an agreement with a custodian for the safe-keeping and administration of Plan assets in excess of amounts required to meet Plan expenses; the Administrator will invest Plan assets and may delegate investment decisions to a bank, trust company or investment counsel firm; the Administrator will make payments with respect to a) benefits, b) administrative expenses and operating fees of the Plan, and custodial, legal, actuarial, consulting and investment management fees, and c) any taxes payable by the Plan.

6.Benefits under the Plan are paid to a Participating Employer in respect of an Eligible Person described in 3 above as follows: a) $10,000, b) $4000 less amount of coverage under XXXXXXXXXX Paid-Up Life Plan, c) $1500 less the amount of coverage under the XXXXXXXXXX Paid-Up Life Plan, d) amounts determined in accordance with a plan that precludes individual selection and approved by the Pension Committee.

7.Amounts due under the Plan will be paid to the Participating Employer within 30 days of the Administrator receiving satisfactory proof of the Eligible Person's death. However, if the Plan has insufficient funds to cover the amount of the payment when due, the payment will be reduced or delayed in such equitable manner as the Committee considers appropriate.

8.No Eligible Person or Participating Employer is entitled to any recompense or damages from the XXXXXXXXXX, the Administrator, the Committee in respect of the operation of the Plan or on account of the inability of the Plan to provide benefits. The Committee and Administrator are not liable for any liability or debt of the Plan, nor for the non-fulfilment of any contract, nor for any other liability arising in connection with the administration of the Plan and the administration and investment of the Plan assets.

9.The Committee expects to continue the Plan indefinitely but reserves the right to amend or terminate the Plan at any time, without the approval or consent of the Participating Employers.

10.If the Plan terminates, none of the assets of the Plan will revert to the Participating Employers until provision has been made for all benefits due before the termination date.

LAW:

An "employee benefit plan" is defined in subsection 248(1) and the words which are relevant to the Plan described above are as follows:

An arrangement under which contributions are made by an employer ... to another person with whom the employer does not deal at arm's length (... the "custodian" of an employee benefit plan) and under which one or more payments are to be made to or for the benefit of employees or former employees of the employer or persons who do not deal at arm's length with any such employee or former employee.

An amount out of an "employee benefit plan" is taxable in accordance with paragraph 6(1)(g) of the Act as follows:

The total of all amounts each of which is an amount received by the taxpayer in the year out of or under an employee benefit plan ... other than the portion thereof that is (i) a death benefit or an amount that would, but for the ($10,000) deduction ..., be a death benefit.

A "death benefit" is defined in subsection 248(1) of the Act and the words which are relevant to determining ISSUE 3 above are as follows:

The total of all amounts received by a taxpayer in a taxation year on or after the death of an employee in recognition of the employee's service in an office or employment....

ANALYSIS:

ISSUE 1

The Plan provides that no employee, former employee or spouse of either has any right to "recompense or damages" from the XXXXXXXXXX, the Administrator or the Committee on account of the inability of the Plan to provide benefits (see 8 above). (In fact, since an Eligible Person must die before benefits are due, any right to sue in this respect would lie with the estate or beneficiary who is to receive the death benefit. Furthermore, the limiting of liability is not extended to the Plan itself although this may not be significant since Plan assets will be held by the Administrator (either as trustee of the Plan or as agent or employee of the XXXXXXXXXX) and a claim against the "Plan" itself would probably be insufficient.)

The Plan further provides that all payments of benefits are to be made to the Participating Employer in respect of any death of an Eligible Person (see 7 above).

Finally, the Plan provides that on termination the assets will be used first to satisfy claims for benefits and after these are satisfied the remaining assets will revert to the Participating Employers (see 10 above).

The Plan, therefore, does not satisfy the requirement in the definition of "employee benefit plan" that payments are to be made to employees, former employees or persons who do not deal at arm's length with employees or former employees. And because of the various provisions of the Plan which provide that all payments are made to the employers and which prevent an employee, former employee, or spouse thereof from having any claim against the holder of the Plan assets, the remaining condition that the payments be made for the benefit of employees, former employees or non-arm's length persons is likewise unsatisfied.

One could argue that since the Plan benefits are defined by relation to specific employees, former employees, or their spouses that payments are indeed "for (their) benefit". But since the employer is not obliged under the terms of the Plan to pay the amounts over to the deceased's beneficiaries the connection is too remote.

The fact that no employee, spouse, or former employee, estate or other beneficiary would be required to include any income pursuant to paragraph 6(1)(g) of the Act in connection with benefits under this Plan - there is no amount received by them "out of or under the plan" - is another although less significant factor weighing against characterization of the Plan as an "employee benefit plan".

ISSUE 2

Although it is not possible to determine the nature of the plan from the submission, the only settlor and beneficiaries (if it is a reversionary trust under subsection 75(2), policy holder and beneficiaries (if it is an insurance arrangement) or custodian (if it is a custodial arrangement) are tax-exempt entities and therefore earnings are not taxable. A warning was placed in the ruling to the effect that nothing should be taken to confirm or imply the nature of the plan under the Act.

ISSUE 3

The benefits payable under the Plan may be made with respect to the deaths of spouses of employees or retired employees and with respect to the deaths of retired employees. A "death benefit" as defined in the Act is an amount received "on or after the death of an employee in recognition of the employee's service".

The amount received in respect of a retired employee may be a death benefit even though the words in the definition refer to "employee". It is our position that death benefits may be paid on the deaths of former employees. See technical interpretations XXXXXXXXXX and XXXXXXXXXX and Interpretation Bulletin IT-508R ("Death Benefits"). Furthermore, there is nothing in the description of the Plan which would cause the payments to be characterized as something other than a death benefit. (The alternatives discussed in IT-508R are payments out of a superannuation or pension plan, payments out of a salary deferral arrangement or a retirement compensation arrangement, deferred employment income under subsection 6(3) of the Act, overtime pay due the deceased and a retiring allowance due to the employee before death.)

ISSUE 4

Section 24 reviewed this issue and developed new positions.

If the employee is still alive when spouse dies, the benefit results from the employment relationship and the employee is taxable on the amount whether received by employee or someone else.

If employee is dead when spouse dies, the amount paid is considered a "death benefit" (subject to the exclusion of up to $10,000 with respect to the total amount(s) received on the death of both the employee and the spouse) in that it is both received after the death of the employee and in recognition of the employment of the employee.

Rulings on both these tax consequences were provided although not requested by the representative.