Business Insurance

Deferred compensation is the term that has been given by the life assurance industry to and arrangement whereby an employer funds an endowment policy on the life of an employee (or a company on the life of a director) with the intention of using the policy proceeds to pay a gratuity to the employee (or director) upon his retirement or earlier death.

Funding a gratuity in this manner is cost effective because of certain tax concessions contained in the Income Tax Act. In addition, with the advent of the taxation of fringe benefits, contributions to a deferred compensation scheme remains one of the very few benefits from employment that is not taxable.

The relevant provisions of the Income Tax Act, and the application thereof, apply equally to employees and directors. However, for the sake of clarity, the terms "employer" and "employees" will be used.

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