Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the Department.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle du ministère.
Principal Issues:
Whether or not a life insurance policy is an RCA
Position TAKEN:
Yes it is, subject to coming in force rules
Reasons FOR POSITION TAKEN:
The legislation
XXXXXXXXXX 5-942972
Attention: XXXXXXXXXX
January 17, 1995
Dear Sirs:
Re: Retirement Compensation Arrangements ("RCA")
This is in reply to your letter of October 3, 1994 sent to your local District Office which was then forwarded to our Directorate, concerning the tax implications of corporate owned permanent life insurance policies. In particular, you would like to know the tax consequences of policies which were purchased with the intent of providing keyman insurance for managers of the company, to fund the buy/sell agreement between the two owners and to provide retirement funds for the key personnel. The situation described in your letter is an actual fact situation and as noted in Information Circular 70-6R2, we do not express opinions on specific proposed transactions other than as a reply to an advance income tax ruling request. Where a completed transaction is involved, the enquiry should be addressed to the relevant District Taxation Office. However, we offer the following general comments which may or may not apply to your particular fact situation.
Whether an RCA or an arrangement is created as contemplated by subsections 248(1) or 207.6(2) of the Income Tax Act (the "Act") is a question of fact which can only be determined by looking all the facts in the case. Pursuant to subsection 248(1) of the Act an RCA specifically excludes payments made to acquire an interest in a life insurance policy, except in the situation when the employer "acquires an interest" in a life insurance policy in order to fund retirement benefits the employer is obliged to provide to the employee, then subsection 207.6(2) of the Act will deem the arrangement to be an RCA.
Pursuant to subsection 207.6(2) of the Act, the person who acquires the policy is considered to be the custodian of an RCA, the life insurance policy is considered to be the "subject property" of the RCA, an amount equal to twice the amount of any premium paid under the policy is treated as a contribution to an RCA, and payments under the policy, including a policy loan, and refunds of refundable tax are treated as distributions by an RCA. Thus, the employer, former employer or a person or partnership with whom the employer or former employer does not deal at arm's length who acquires an interest in a life insurance policy will be required to withhold tax from any premium paid under the policy and to file the returns and pay the 50% refundable tax pursuant to subsection 207.7 of the Act.
The definition in subsection 248(1) of the Act of an RCA is applicable after October 8, 1986. However, where an arrangement that is also an RCA existed on that date, the RCA rules will not apply to the arrangement before January 1, 1988 or such earlier date after October 8, 1986 on which the arrangement has been materially altered. The "grandfathered" arrangement will treated as two separate plans consisting of
a)a statutory plan that comes into existence on January 1, 1988 (assuming that the plan was not materially altered between October 8, 1986 and that date), and
b) the original plan, which is deemed not to be an RCA.
All contributions to the plan after December 31, 1987 and all property that can reasonably be considered to derive from those contributions are deemed to be property held in connection with the statutory plan, which property is subject to the RCA rules.
We trust our comments will be of assistance to you.
Yours truly,
for Director
Financial Industries Division
Rulings Directorate
Policy and Legislation Branch
