15 December 2008 External T.I. 2007-0257591E5 - Payment of Account Value on Disablement of Insured

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:

Does the payment of all or part of the account value of a universal life policy on disablement of the life insured qualify as a "disability benefit" for purposes of paragraph (h) of the definition of "disposition" in subsection 148(9) of the Act?

Position:

Likely not.

Reasons:

A payment restricted to the amount of the account value of the policy does not appear to constitute a disability benefit.

2007-025759
XXXXXXXXXX Helen Zelobowski
(519) 571-6987
December 15, 2008

Dear XXXXXXXXXX :

Re: Payment of Account Value on Disablement of Life Insured on Universal Life Policy

We are writing in response to your letter dated November 3, 2007 requesting our comments on a hypothetical insurance arrangement involving disability benefits under a universal life policy. We understand that in this hypothetical arrangement, the payment under the policy on the disablement of the insured is restricted to the account value of the policy. We also understand that the policyholder has discretion over the amount of the benefit to be paid. In addition, if the life insured continues to be disabled, a benefit restricted to the account value that exists as of each policy anniversary date may be paid.

You have asked for confirmation that the payment of all or part of the account value of a universal life policy on disablement of the life insured would qualify as a "disability benefit" for purposes of paragraph (h) of the definition of "disposition" in subsection 148(9) of the Income Tax Act (the "ITA"). 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.

A "disposition" of an interest in a life insurance policy is defined in subsection 148(9) of the Act. Paragraph (h) of this definition clarifies that a disposition does not include a payment under a policy as a disability benefit. The term "disability benefit" is not defined in the Act. In our view, the factual circumstances at the time of a payment and the terms and conditions of the life insurance policy will indicate whether or not a payment is a "disability benefit". It is not clear to us that a payment that is linked to a return to the policyholder of investment income earned in the policy would necessarily constitute a "disability benefit" even though the payment may be triggered by an event of disability, particularly where the policyholder has discretion over the amount of the benefit to be paid. The purpose of a disability policy is to replace income lost due to the disablement of the insured. Therefore, payments under such policies should not be capped to the amount of the account value of the policy.

We trust that these comments will be of assistance.

Yours truly,

F. Lee Workman
Manager
Charitable and Financial Institutions Sectors
Financial Sector and Exempt Entities Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch