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:
Please refer to the question referred to below.
Position:
Please refer to the response referred to below.
Reasons:
The interpretation of the definitions, "premium" and "adjusted cost basis" referred to in subsection 148(9) of the Income Tax Act.
CALU -Conference for Advanced Life Underwriting (2006)
Question 4
Adjusted Cost Basis of a Universal Life Policy on Substandard Life
One of the amounts included in computing the adjusted cost basis (ACB) of a life insurance policy to the policyholder is the premium paid under the policy. Pursuant to the definition of "premium" in subsection 148(9), premiums do not include the portion of any amount paid under a policy with respect to "an additional risk as a result of insuring a substandard life". Thus, to the extent that the premiums under a policy are higher than the standard premiums because of the state of health of the life insured, the additional amount of premiums would not be included in computing the ACB of the policy.
The issue in this question is whether the exclusion applies with respect to premiums paid under a universal life insurance policy where the life insured is a substandard risk. The relevant policy terms are as follows. The policy allows the policyholder to pay premiums each year within a range of permissible amounts. Premiums (net of related premium tax) are credited to the policy fund, which is used to determine the cash surrender value of the policy. A monthly charge is deducted from the policy fund in respect of the mortality risk assumed by the insurer and the insurer's administration costs. The monthly mortality charge is higher than it would be if the life insured were in a good state of health.
Question:
Does the CRA agree that the full amount of each premium paid under the universal life insurance policy is included in the ACB of the policy?
Agency's Response
In calculating the ACB of a life insurance policy pursuant to subsection 148(9) a deduction is made for the net cost of pure insurance (NCPI) of the interest in the policy pursuant to component L. The NCPI, which is calculated pursuant to section 308 of the Income Tax Regulations, is calculated with reference to mortality tables based on standard lives. This will be the case whether the policy is a whole life policy or a universal life policy.
The monthly mortality charge, which is deducted from the policy fund, affects the cash surrender value of the policy but is not taken into account in computing the deduction for NCPI under component L of the ACB calculation of the policy. Therefore as the premium paid over the life of the policy will include an amount with respect to the additional risk for insuring a substandard life the full amount of the premium cannot be included in the ACB of the policy. Only the portion of the premium that does not relate to an additional risk as a result of insuring a substandard life should be included in computing component B of the ACB pursuant to subsection 148(9).
May 9, 2006
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