13 July 2000 External T.I. 2000-0010115 - GROUP TERM LIFE INSURANCE POLICY

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: Whether an administrative arrangement between an employer and an insurance company, where an amount is paid by the insurance company to the estate (or beneficiary) and then receives a reimbursement of that amount from the employer, is a "group term life insurance policy", as defined in subsection 248(1) of the Act, for the purposes of subsection 6(4) of the Act.

Position: No

Reasons: A contract, which does not involve a transfer of risk, is not considered to be a "policy of insurance." A payment made pursuant to such an arrangement is considered to be a "death benefit", as defined in subsection 248(1) of the Act.

XXXXXXXXXX 2000-001011
M. Eisner
July 13, 2000

Dear XXXXXXXXXX:

Re: Group Term Life Insurance

This is in reply to your letter of February 25, 2000 concerning the above-noted subject. We apologize for the delay in replying.

In the circumstances of your situation, an employer, for the purposes of providing a benefit in respect of a deceased employee, has entered into a contract with an insurance company. In the event of the death of an employee, the insurance company will pay the employee's estate a fixed amount, which is usually $100,000. The employer is then required to pay the insurance company an amount equal to all such benefits paid by the insurance company in the year, plus an administration fee and interest.

The benefit paid in respect of the death of an employee is separate and is not related or combined with any other benefits that employees receive. No contributions are made on behalf of all employees for this benefit. The employer does not make any contributions into any trust account to allow for these payments.

The employer is treating the benefit as being in respect of a group term life insurance policy; i.e., the employer is totalling the amount of the payments made to the insurance company, and then dividing this amount by the number of participants (employees) that have coverage in order to arrive at the amount of an employee's taxable benefit. A payment made to an employee's estate is not considered to give rise to a taxable benefit.

Your concern relates to the tax treatment of the above arrangement with respect to the employees.

Our Comments

In order to determine the tax consequences of the foregoing situation, it would be necessary to review all the relevant facts and documentation. As such a review falls within the responsibility of your local tax services office, a submission should be made to the Client Services Division of the office in your area. However, we are providing you with the following general comments.

When an employee's life is insured under a "group term life insurance policy" as defined in subsection 248(1) of the Income Tax Act (the "Act"), there must be a policy of insurance in place pursuant to that definition. It is our general view that a policy of insurance must involve a transfer of risk. A contract which does not involve a transfer of risk (including an administrative services only arrangement between an employer and an insurance company where an amount is paid by the insurance company to the estate (or beneficiary) and then receives a reimbursement of that amount from the employer) does not likely qualify as a group term life insurance policy. Accordingly, benefits would not be included in employees' incomes under subsection 6(4) of the Act in respect of such an arrangement.

It is our view general view that the receipt of the amount by an estate or beneficiary pursuant to an administrative arrangement, as described in your letter (i.e., essentially, the amount is paid out of employer funds), would likely be treated as a death benefit as defined in subsection 248(1) of the Act. Interpretation Bulletin IT-508R "Death Benefits" (copy enclosed) explains how to calculate the amount of the death benefit that is to be included in income under subparagraph 56(1)(a)(iii) of the Act.

We trust that these comments are of assistance to you but caution you that they do not apply to any particular fact situation. As noted above, the documentation and facts would have to be examined before more definitive comments could be made.

Yours truly,

John Oulton
for Director
Business and Publications Division
Income Tax Rulings Directorate
Policy and Legislation Branch

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