2 November 2001 External T.I. 2001-0079225 - EXEMPTION TEST 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 CCRA.

Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ADRC.

Principal Issues: Meaning of benefit on death in Reg. 306(3)

Position: Depends on particular life insurance policy, but may include the face amount of the policy plus any accumulated funds.

Reasons: Definition of benefit on death.

XXXXXXXXXX K. Cooper, LL.B.

2001-007922
November 2, 2001

Dear XXXXXXXXXX:

Re. Interpretation of Regulation 306(3)

This is in reply to your letter of April 4, 2001 wherein you requested our views as to the interpretation of subsection 306(3) of the Income Tax Regulations in the circumstances described in your letter. In particular, you are seeking confirmation of how the 8% limit on increases to the value of the benefit on death is applied in a circumstance where the contractual death benefit of a universal life insurance policy is defined to include the face amount of the policy plus the fund value (accrued investment account balance).

Written confirmation of the tax implications inherent in particular transactions are given by this Directorate only where the transactions are proposed and are the subject matter of an advance income tax ruling request. Where the particular transactions are completed, the inquiry should be addressed to the relevant Tax Services Office for their views. As the matters on which you have asked us to comment are essentially questions of fact rather than interpretation of the law we can only offer the following general comments that may be of assistance.

Pursuant to section 306 of the Income Tax Regulations, the exempt status of a particular policy is generally determined by reference to the accumulating fund of an "exemption test policy" (ETP) at various points in time. Paragraph 306(3)(a) provides that an initial ETP will be deemed to have been issued to the policyholder in respect of a life insurance policy on the date of its actual issue. Where the amount of the benefit on death is subsequently increased and on a policy anniversary the amount of the initial benefit on death and the addition exceeds 108% of the benefit on death on the later of the date of issue of the policy or the date of the previous anniversary, an additional ETP will be deemed to be issued for the excess benefit on death over the 8% added to the original ETP.

While section 310 of the Regulations stipulates that "benefit on death" does not include policy dividends or interest thereon held on deposit by an insurer or any accidental death benefits, it does not otherwise specify what is to be included. However, it is our view that a "benefit on death" for the purposes of the calculation in subsection 306(3) of the Regulations would include any amount provided in the policy to be a "benefit on death" or "death benefit" and any amount that based on the construction of the particular policy can be determined to be an amount payable in the event of death, which may well include the fund value.

While we hope our comments are of assistance to you they do not constitute an advance income tax ruling and therefore are not binding upon the Department in respect of a specific situation.

Yours truly,

F. Lee Workman
Manager
Financial Institutions Section
Financial Industries Division
Income Tax Rulings Directorate
Policy and Legislation Branch