6 March 2008 External T.I. 2007-0256141E5 - RCAs and Life Insurance Policies

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: How the RCA rules apply to life insurance policies acquired as a means of funding a plan or arrangement to provide retirement benefits.

Position: General comments provided.

 							2007-025614
XXXXXXXXXX 						Bruce Hartt
                                          (613) 948-5273
March 6, 2008

Dear XXXXXXXXXX :

Re: Request for technical interpretation - Universal Life Policy

This is in reply to your facsimile of October 17, 2007 wherein you had requested general comments on how the retirement compensation arrangement ("RCA") rules apply to a corporate owned life insurance policy that was acquired by a corporation for the purpose of funding the retirement of its shareholder and employee.

Our Comments

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 submitted in the manner set out in Information Circular 70-6R5, Advanced Income Tax Rulings, dated May 17, 2002. Where the particular transactions are completed, the inquiry should be addressed to the relevant tax services office. The following comments are, therefore, of a general nature only and are not binding on the Canada Revenue Agency ("CRA"). All publications referred to herein can be accessed on the CRA website at the following address: http://www.cra-arc.gc.ca/tax/technical/incometax/menu-e.html.

An RCA is defined in subsection 248(1) of the Income Tax Act ("Act") as generally being an arrangement under which payments are made by an employer of a taxpayer to a custodian in connection with benefits that are to be received by a person on, after or in contemplation of any substantial change in the services rendered by the taxpayer, the retirement of the taxpayer, or the loss of an office or employment of the taxpayer, subject to certain listed exclusions. An insurance policy is specifically excluded from the definition of an RCA, however, where an employer has acquired an interest in a life insurance policy as a means of funding a plan or arrangement to provide retirement benefits, subsection 207.6(2) of the Act, generally provides that, an RCA that holds the policy as its subject property is deemed to exist.

An employer may only deduct amounts paid in the year as a contribution to an RCA where the amounts are reasonable and the contribution must be made in respect of services rendered by an employee or former employee of the taxpayer. Any contributions to an RCA are subject to a special 50% refundable tax. Where a contribution is made to an RCA for the purposes of paying a life insurance policy premium, the employer will need to contribute an amount equal to twice the policy premium to enable the custodian to withhold and remit the tax and to pay the policy premium.

Detailed explanations concerning the tax treatment of an RCA can to be found in the Agency's publication entitled T4041 Retirement Compensation Arrangement Guide, including any withholding, remitting and reporting requirements, a copy of which is available on the CRA website noted above. The guide also discusses life insurance policies, including annuities, qualifying as an RCA.

We trust that the above comments will be of assistance to you.

Yours truly,

Mary Pat Baldwin, CA
for Director
Financial Sector and Exempt Entities Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch