25 October 2002 External T.I. 2002-0151645 - INSURANCE PREMIUM REBATES

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:

1) Would a "premium rebate" be included in the income of a policyholder?

2) Could income from a life insurance policy be considered income from property for the purposes of paragraph 12(1)(x) of the Act.

Position:

1) Unable to answer.

2) Yes.

Reasons:

1) Insufficient information to enable a determination of the legal relationships among the parties to the arrangement and the legal relationships must be known before the tax implications can be determined.

2) "Property" is very broadly defined to include rights of any kind whatever and an insurance policy is essentially a bundle of rights set out under the insurance contract. Income from certain life insurance policies is required to be included in income under section 12.2 of the Act, which is found in Subdivision b - Income or Loss From a Business or Property, in Division B of Part I of the Act. If the rebate is received in the course of earning that income, paragraph 12(1)(x) of the Act could apply.

XXXXXXXXXX 						2002-015164
							Alison Campbell
October 25, 2002

Dear XXXXXXXXXX:

Re: Insurance Premium Rebates

This is in reply to your letter of July 10, 2002 wherein you requested our comments on the tax implications to a policyholder who receives what you refer to as a premium rebate in connection with the purchase of a newly issued universal life insurance policy. Written confirmation of the tax implications inherent in particular transactions is 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.

It is difficult to provide even general comments which may be of assistance to you in trying to determine the tax implications of a situation similar to the one you describe. Your question deals with the tax consequences of a legal arrangement among an insurer, insurance dealer/sales agent and the purchaser of a life insurance policy. The legal form of transactions must be considered in determining the application of the Income Tax Act (the "Act"). Without the opportunity to review all the relevant agreements which define the rights and obligations of each party, there is insufficient information for us to determine the tax consequences to any party. We are prepared however, to make the following general comments.

With respect to the possible application of paragraph 12(1)(x) of the Act to the receipt of a "premium rebate" by a policyholder, it is your view that this provision could not apply because the preamble to paragraph 12(1)(x) of the Act, requires that the amount received by the taxpayer in the year be received "in the course of earning income from business or property", and in your view, income from a life insurance policy is income from a source other than business or property. Without the opportunity to examine the relevant documentation we are unable to express a view as to whether the premium rebate would be an amount that is received "in the course of earning income from property", which would be necessary for a determination of whether the premium rebate could be included in income pursuant to paragraph 12(1)(x) of the Act.

We would note however, that the term "property" is very broadly defined in subsection 248(1) of the Act, to mean "any property whatever whether real or personal or corporeal or incorporeal and, without limiting the generality of the foregoing, includes a right of any kind whatever..." An insurance policy, in very general terms, is a bundle of rights provided for under a contract with an insurer. It is our view that this bundle of rights is "property" for the purposes of the Act. We also note that section 12.2 of the Act, provides for an amount to be included in the computation of income from a business or property in respect of what is essentially the annual accrual of investment income earned within an insurance policy. On the basis of these provisions, it is our view that income received by a taxpayer in respect of a life insurance policy would not necessarily be precluded from being considered income received in the course of earning income from property for the purposes of paragraph 12(1)(x) of the Act. Since the premium rebate you describe will effectively contribute to the investment income earned in the policy, it would seem arguable that the rebate could be considered to be received in the course of earning income from property for the purpose of paragraph 12(1)(x) of the Act.

We hope that our comments will be of assistance to you.

Yours truly,

F. Lee Workman
Manager
Financial Institutions Section
Income Tax Rulings Directorate
Policy and Legislation Brach