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: Where an insurer is unable to determine the "modified net premium" in respect of universal life insurance policies, can the insurer assume that the amount determined under subparagraph 1401(1)(c)(ii) is nil?
Position: Where an insurer can support it's position that no reasonable amount can be determined under paragraph (b) of the definition of "modified net premium" in respect of its universal life insurance policies, then we will accept that the amount determined under paragraph 1401(1)(c) in respect of those policies is the amount determined under subparagraph 1401(1)(c)(i) for the purposes of computing the insurer's liability under Part XII.3 and its income for purposes of Part I of the Act.
Reasons: Words of paragraph (b) of the definition of "modified net premium" in subsection 1408(1) of the Regulations, state that it applies "in any other case" and accordingly insurers must attempt to provide a reasonable calculation of the "modified net premium" in respect of universal life insurance policies. Where they insurer can satisfy the Minister that there is no reasonable amount that can be determined under paragraph (b) of the definition of "modified net premium" then we are prepared to accept that the insurer may use the amount determined under subparagraph 1401(1)(c)(i), in respect of its universal life insurance policies, to be the amount determined under paragraph 1401(1)(c) for all purposes under the Act.
XXXXXXXXXX 2005-014582
Alison Campbell
March 28, 2006
Dear XXXXXXXXXX:
Re: Computation of the Investment Income Tax - Universal Life Insurance Policies
We are writing in reply to your letter of August 5, 2005 wherein you requested our views on the computation of an insurer's investment income tax liability under section 211.1 of the Income Tax Act (the "Act"). In particular you requested our views on whether, in the event an insurer is unable to compute the "modified net premiums" in respect of its universal life policies, the insurer may assume that the amount determined under paragraph 1401(1)(c)(ii) of the Regulations to the Income Tax Act ("Regulations") can be ignored or considered to be a nil amount.
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 ruling request submitted in the manner set out in Information Circular 70-6R5, dated May 17, 2002. Questions concerning completed transactions should be addressed to the local taxation service office. We are, however, prepared to provide the following comments which may be of assistance.
With respect to universal life insurance policies, the amount of an insurer's liability under section 211.1 of the Act, includes the maximum amount that would be determined under paragraph 1401(1)(c) of the Regulations. The amount determined under subparagraph 1401(1)(c)(i) is based upon the cash surrender value ("CSV") of the policies, while the amount determined under subparagraph 1401(1)(c)(ii) is based upon the "modified net premium" under the policies. The term "modified net premium" is defined in subsection 1408(1) of the Regulations.
In addition to determining an insurer's liability under section 211.1 of the Act, paragraph 1401(1)(c) of the Regulations is also relevant in determining an insurer's liability under Part I of the Act. The maximum amount of an insurer's deductible reserves under Part I of the Act, in respect of its pre-1996 universal life insurance policies, is determined under paragraph 1401(1)(c) of the Regulations.
It has been suggested that an insurer is unable to compute an amount under subparagraph 1401(1)(c)(ii) of the Regulations, because an insurer would not be able to compute the "modified net premium" of universal life insurance policies given that universal life insurance policies do not have fixed premiums or even a defined method of determining the premiums that will be payable or when the premiums will be payable. Paragraph (a) of the definition of "modified net premium" in subsection 1408(1) of the Regulations applies where all benefits (other than policy dividends) and premiums (other than the frequency of payment of premiums) in respect of the policy are determined at the date of issue of the policy. Where paragraph (a) applies, the "modified net premium" is to be calculated based on a formula set out in paragraph (a). On the basis that the amount and the timing of the premiums under the policy are not determined at the date of the issue of the policy, we would agree that paragraph (a) of the definition of "modified net premium" would not apply. We note however, that paragraph (b) of the definition of "modified net premium" states that it applies, "in any other case". Paragraph (b) requires the insurer to determine the amount that would be determined under paragraph (a) of the definition, if the amount were adjusted in a manner that is reasonable in the circumstances.
In the event the insurer can support its position that no reasonable amount in respect of its universal life insurance policies can be computed under paragraph (b) of the definition of "modified net premium", it is our view that it would be acceptable to consider the amount determined under paragraph 1401(1)(c) of the Regulations to be equal to the amount determined under subparagraph 1401(1)(c)(i) of the Regulations, which is based on the CSV of the universal life insurance policies. The insurer should be prepared to support its position that it is unable to determine any amount under subparagraph 1401(1)(c)(ii) of the Regulations in respect of its universal life insurance policies. In such circumstances, we would expect that the amount claimed by the insurer under paragraph 1401(1)(c) of the Regulations as a Part I reserve deduction in respect of its pre-1996 universal life insurance policies, would not exceed the amount determined under subparagraph 1401(1)(c)(i) of the Regulations.
While the preceding comments are not binding on the Agency, we do hope that they are of assistance to you.
Yours truly,
F. Lee Workman
Manager
Charitable and Financial Institution Sectors
Income Tax Rulings Directorate
Financial Sector and Exempt Entities Division
Legislative Policy and Regulatory Affairs Branch
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