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.
Principal Issues: Regulation 308 requires that the mortality data set out in the 1969-75 mortality tables of the Canadian Institute of Actuaries be used in computing the net cost of pure insurance (NCPI) of an interest in a life insurance policy. These table provide mortality data for life insureds up to an issue age of 70. We are asked how the Regulation is to be interpreted where a policy is underwritten for a life insured that is older than age 70. Where more than one method is available to determine an appropriate mortality rate, must the insurer use the same method for all life insurance policies it issues for life insureds older than age 70?
Position: Where the tables do not prescribe a particular rate of mortality due to the age of the life insured, it is necessary to extrapolate from the information set out in the tables in order to derive the appropriate NCPI for a particular life insurance policy. The method employed to determine the appropriate mortality rate in such circumstances must reflect the mortality data in the tables. This determination would appropriately be made by the company's actuary(ies) in accordance with accepted actuarial practices. The method selected must be employed consistently across all the company's policies of the particular class for which such extrapolation is necessary.
Reasons: Words and purpose of Regulation 308.
XXXXXXXXXX 2005-011480
R. Maley
May 12, 2005
Dear XXXXXXXXXX:
Re: Net Cost of Pure Insurance
This is in reply to your letter of February 7, 2005 requesting our comments on the correct interpretation of section 308 of the Income Tax Regulations ("the Regulation") which defines the net cost of pure insurance ("NCPI") in a taxation year of a taxpayer's interest in a life insurance policy. The Regulation specifically cross-references the 1969-75 mortality tables of the Canadian Institute of Actuaries published in Volume XVI of the proceedings of the Canadian Institute of Actuaries ("the tables"), which provide mortality data for life insureds up to an issue age of 70. You ask how the Regulation is to be applied where a policy is underwritten for a life insured that is older than age 70. In this regard, you have referred us to an article posted on the Conference for Advanced Life Underwriting website ("the CALU article") which discusses this issue.
You have asked that we comment on the two alternatives for computing NCPI discussed in the CALU article and asked whether the CRA would accept either or both alternatives for computing NCPI in circumstances where the life insured is older than age 70. If both of the alternatives are acceptable, you have also asked whether the same alternative must be applied consistently by an insurer to all policies it issues to persons over age 70.
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. However, we are prepared to provide the following comments.
The Regulation provides that the NCPI of a taxpayer's interest in a life insurance policy shall be computed by multiplying the applicable rate of mortality from the tables by the difference between either the benefit payable on death in respect of the interest at the end of the year and the accumulating fund at the end of the year (determined without regard to any policy loan outstanding) or, the cash surrender value of the interest at the end of the year, depending upon which method is regularly followed by the life insurer. The Regulation further provides that, where the premiums for a particular class of life insurance policy are based on characteristics other than sex or smoking classification, the NCPI may be determined using rates of mortality otherwise determined provided that for each age for such class of life insurance policy, the aggregate NCPI would be the same as the expected value of aggregate NCPI had the mortality rates in the tables been used.
In our view, the Regulation is clear that the method selected by the insurer for computing NCPI is intended to be applied uniformly to all policies of the particular class and not varied between policyholders. It is also our view that, irrespective of how the mortality rates are broken down between policyholders having different characteristics, the overall mortality rates reflected in the tables are intended to be reflected in the NCPI calculations made by the insurer.
As such, where the tables do not prescribe a particular rate of mortality due to the age of the life insured, it will be necessary to extrapolate from the information set out in the tables in order to derive the appropriate NCPI for a particular life insurance policy. However, we do not think it appropriate to comment on the CALU article. Instead, it is our view that it would be a reasonable application of the Regulation for a life insurer to compute NCPI using mortality rates that are extrapolated from the tables using a method that is considered by the company's actuary(ies) to be reflective of accepted actuarial practices and provided that the method is employed consistently across all the company's policies of the particular class for which such extrapolation is necessary.
We trust that these comments will be helpful. However, as stated in paragraph 22 of Information Circular 70-6R5, this opinion is not a ruling and consequently, is not binding on the CRA in respect of any particular situation.
Yours truly,
F. Lee Workman
Manager
Financial Institutions Section
Financial Industries Division
Income Tax Rulings Directorate
Policy and Planning Branch
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