8 May 2001 Internal T.I. 2001-0072757 - CRITICAL ILLNESS AND SPLIT DOLLAR INSURANCE

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. How are the views of the Agency to be obtained on critical illness insurance and on split dollar insurance arrangements?

2. What are some of the concerns we may have with split dollar insurance arrangements?

Position:

1. Via an advance income tax ruling request or via the appropriate Tax Services Office.

2. See comments below.

Reasons: This determination is a question of fact.

CALU - Conference for Advanced Life Underwriting (2001)
May 8, 2001

Questions 10

Critical Illness Insurance and Split Dollar Insurance

How do we obtain the Agency's views with respect to the following arrangements:

a) Critical illness insurance products are now widely available in the Canadian market. Insurance coverage for critical illness may be provided under individual "stand-alone" policies, as an additional benefit under a universal life insurance policy or as part of a group benefit plan offered by an employer.

b) Under a split dollar arrangement an employee acquires a life insurance policy and the employee enters into an agreement with his/her employer to allocate the death benefit between the employer and the estate of the employee. The premiums under the policy are to be paid by the employee and the employer will reimburse a portion of the premiums with reference to the premiums the employer would have to pay to obtain comparable coverage on the life of the employee.

Agency's Response

The Agency has not had the opportunity to review the details of a particular critical illness insurance or a specific split dollar insurance arrangement. Written confirmation of the tax implications inherent in particular situations are given by our Directorate only where the transactions are proposed and are the subject matter of an advance income tax ruling request. We, therefore, welcome your industry to provide us with specific critical illness insurance and split dollar insurance arrangements such that we would be in a position to examine the specific issues or concerns which may be raised. Normally, under this process we require that a prospective individual be signed up before we can proceed with our review of an advance income tax ruling request. However, in the context of these arrangements we would also consider a request with a draft policy with expected terms and conditions before the signing up of a particular policyholder. You would be advised of our views with respect to the specific tax issues identified in the ruling request and if you determine that you wish to proceed with a ruling it would be necessary at that time to provide for a specific policyholder and the final terms and conditions of the proposed policy. Where the particular transactions are completed, the inquiry should be addressed to the relevant Tax Services Office. You should submit all relevant facts and documentation to the appropriate Tax Services office for their views. We would be available to provide assistance to the particular Tax Services Office in their review.

With regard to split dollar insurance arrangements we have identified information that we would require as well as some of the specific concerns that would need to be addressed.

All of the relevant terms and conditions of the particular life insurance policy would have to be provided including the death benefit; the cash surrender value or the accumulation within the policy, if any; the premiums to be paid under the policy; the age and health condition of the individual to be insured under the policy. We also require a copy of any side agreement, which is to be entered into between the employer, the employee and/or the insurance company, and any other related documentation.

It will be necessary to establish whether each of the employer and employee have an interest in the policy. This is relevant in determining not only the nature and income tax treatment of payments made by each of the parties but the nature and income tax treatment of the payments received by each of the parties.

We would need to know how the amount of the premium, which is to be reimbursed by the employer to the employee is arrived at. We would also require evidence of the amount of the premium that the employee would be required to pay if he/she was to obtain coverage comparable to that retained by him/her.

We are assuming the reason for entering into this arrangement is a cost reduction from what would be the total premium if two separate policies were acquired. We would require evidence of how this saving will be determined and how it will be shared between the two parties.