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ALEX HARROLD: How death sets you free but taxes don’t

Alex Harrold
Alex Harrold - SaltWire File Photo

This being income tax time, recent online searches on my trusty PC appear to fall into the category of “allowable deductions” and other questions that pop up when some new reportable challenge comes along that you never faced before.

This year, it was the need to report the CPP Death Benefit as income, left by a loved one who trusted you to take care of their affairs.

That’s a good thing, right? How many countries can you name off the top of your head that provide a death benefit to its citizens? Even the U.S. only provides a $255 death benefit, something else you can learn off the Internet. There is however, a hitch to the CPP benefit you may not know about that might have you questioning when a benefit is a benefit.

The first realization you come to is that the benefit is considered as income, and taxable. Government doesn’t deduct tax from the benefit before you receive it. You might begin to wonder about two new things: How much is this going to affect your taxes, and what brainiac decided that paying more taxes is a benefit? Then, it just gets worse.

In order to determine the answer to the first question, you need to compute your income twice: Once without reporting the death benefit, followed by a second go-around that includes reporting the death benefit as income. The difference between the two results is the net effect of the death benefit on what CRA owes you. Or, as it turns out, what you owe them.

You should be sitting down, which is really stupid advice. Who does their taxes standing up? In any event, your calculations the first time might result in you expecting a refund. Let’s say it’s around $429.72. Then, when you complete a second calculation, you determine rather than receiving a refund from CRA, you now owe them $651.93! “What?” you ask yourself. “How can a $2,500 death benefit result in a $1081.65 difference? That’s over a 40 per cent tax rate!”

This seems hard to believe, so a quick check on the computer might get you to the following:

“If you apply for the CPP Death Benefit and you get the maximum of $2,500, you could be required to pay anywhere up to $800 or more in tax on your personal return even though you also had to pay for the funeral with your own money.”

In case you’re wondering, funerals generally cost more than $2,500. And, the benefit is only available if you paid into CPP.

$800 tax on a $2,500 benefit is over a 30 per cent tax rate. The website where this information was found came from a site called www.helpfulcrooks.com.

Not everything on the Internet is true, you know. Time to try another website. Perhaps you should go directly to a CPP website. OK, but prepare for it to get worse still. Here is what it says:

“The CPP Death Benefit is taxable and must be claimed by the person or the estate who receives it. The benefit can be as much as $2,500 and consequently the tax can be as much as $1,200. Therefore, be sure to reserve some of the payment to pay the tax when the income tax return is filed.”

You might want to know this before you pay for the funeral. Casket prices vary.

$1,200 in taxes on a $2,500 Death Benefit is nearly a 50 per cent tax rate. Even helpfulcrooks.com is looking better than that. As to the brainiac referenced earlier, no information was found.

This column could have a different title though: Why You Should Leave Your CPP Death Benefit To Someone You Don’t Like. The End. Literally.

Alex Harrold is a retired teacher and attorney, living in Westport with his wife, Eileen.

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