8 February 2000 External T.I. 2000-0000185 - DEMUTUALIZATION PREMIUM HOLIDAY

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.

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:

1. Where an employer receives a conversion benefit in respect of a group insurance policy and uses it to give its insured employees a premium holiday, will draft subsection 139.1(15) apply to deem the payment not to be an employer contribution for the purposes of paragraph 6(1)(f) and regulations made under subsection 6(4)?

2. If the employer earns interest on the investment of the conversion benefit and uses the interest to give the insured employees a premium holiday, will the provisions of draft subsection 139.1(15) apply to deem the payment not to be an employer contribution?

3. Does the premium holiday constitute a taxable benefit to the insured employees?

Position:

1. Yes, provided that all the conditions set out in draft subsection 139.1(15) are met.

2. No. It is our view that draft subsection 139.1(15) allows the employer to contribute an amount up to the value of the conversion benefit. Since interest earned by the employer does not constitute part of the conversion benefit, draft subsection 139.1(15) will not apply.

3. No, provided that the group insurance plan is one of the exceptions set out in subparagraph 6(1)(a)(i).

Reasons:

1. Wording of subsection 139.1(15).

2. Wording and intent of subsection 139.1(15).

3. Paragraph 6(1)(a).

XXXXXXXXXX 		2000-000018

Attention: XXXXXXXXXX

February 8, 2000

Dear Sir:

Re: Conversion Benefit and Premium Holiday

This is in reply to your letter dated December 21, 1999 wherein you requested an advance income tax ruling with regard to the application of the draft legislation released on December 15, 1998 to a proposal to allocate a conversion benefit received by the XXXXXXXXXX (the "City") to its employees.

You advise that in XXXXXXXXXX the City, as the policyholder, received a conversion benefit of $XXXXXXXXXX from XXXXXXXXXX of which $XXXXXXXXXX relates to the long term disability insurance plan and $XXXXXXXXXX relates to the optional life insurance plan (term insurance). The City intends to allocate the portion of the conversion benefit attributable to these two plans to its employees in the form of a "premium holiday". Essentially, the cash from the conversion benefit will be used to pay the premiums for a period of time, thus giving the employees a premium holiday. Since interest has been earned on the conversion benefit fromXXXXXXXXXX, the City plans to use the interest earned in calculating the length of the premium holiday.

As stated in paragraph 20 of Information Circular 70-6R3, we do not provide advance income tax rulings on draft income tax legislation. However, we can offer the following general comments.

The Notice of Ways and Means Motion tabled in the House of Commons on December 7, 1999 contains the income tax amendments relating to the demutualization of insurance corporations that were released on December 15, 1998. In particular, draft subsection 139.1(15) of the Income Tax Act (the "Act"), which applies to transactions that occur after December 15, 1998, allows an employer that receives a conversion benefit in respect of a group insurance policy to contribute an amount equal to the value of the conversion benefit to the policy without the contribution being considered an employer contribution for the purposes of paragraph 6(1)(f) of the Act and regulations made under subsection 6(4) of the Act. Draft subsection 139.1(15) of the Act also provides that the employer is not entitled to deduct from income a premium to which the subsection applies.

For draft subsection 139.1(15) of the Act to apply, the following conditions must be met:

• a stakeholder receives a conversion benefit because of the stakeholder's interest in a group insurance policy under which employees are insured;
• the full cost of a particular insurance coverage under the policy was borne by the employees insured under the particular coverage;
• the stakeholder pays a premium in respect of the particular insurance coverage; and
• either the premium was deemed to be paid under draft paragraph 139.1(9)(c) of the Act or it is reasonable to conclude that the stakeholder intended to apply, for the benefit of the insured employees, all or part of the value of the portion of the conversion benefit that can reasonably be considered to be in respect of the particular insurance coverage.

In the situation described, if all of the above conditions are met, it is our view that draft subsection 139.1(15) of the Act will apply to deem the premium (excluding interest earned) paid by the City to have been paid instead by the insured employees with the result that the long term disability plan and the optional life insurance plan will continue to be regarded as being fully employee-funded for income tax purposes. Accordingly, payments out of the long term disability plan will not be subject to tax in the hands of the employees under paragraph 6(1)(f) of the Act and no benefit will be included in the employees' income under subsection 6(4) of the Act in respect of the premium paid by the City under the optional life insurance plan.

With regard to the interest earned on the investment of the conversion benefit, it is our view that draft subsection 139.1(15) of the Act will not apply given that the interest earned does not constitute part of the conversion benefit. Accordingly, if the City uses the interest earned to give a premium holiday to its insured employees, the payment by the City will be considered an employer contribution and the plans will no longer be regarded as being fully employee-funded.

You also enquired whether the premium holiday would constitute a taxable benefit to the employees. Paragraph 6(1)(a) of the Act provides for the inclusion in computing the income of a taxpayer from an office or employment of the value of board, lodging and any other benefits, received or enjoyed by the taxpayer in respect of or in the course of employment, other than those benefits specifically excluded. Subparagraph 6(1)(a)(i) of the Act specifically excludes as a benefit under paragraph 6(1)(a) of the Act any benefit derived from the contributions of the taxpayer's employer to certain plans such as a group sickness or accident insurance plan or a group term life insurance policy. Accordingly, it would appear that the premium holiday would not constitute a taxable benefit to the insured employees.

We note that our comments are based on draft legislation and represent our views should the draft legislation be enacted as currently proposed. While we hope that our comments will be of assistance to you, they are given in accordance with the practice referred to in paragraph 22 of IC-70-6R3 and are not binding on the Agency in respect of any particular situation.

Yours truly,

Manager
Financial Institutions Section
Financial Industries Division
Income Tax Rulings Directorate
Policy and Legislation Branch

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