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 the only property an RCA trust holds at the end of a year is an exempt insurance policy that has a cash value, with underlying investments being shares, bonds, mutual funds, etc., is an election under subsection 207.5(2) available?
Position: No.
Reasons: An election under subsection 207.5(2) is possible where the only property held by an RCA trust at the end of a taxation year consists of cash, debt obligations and shares listed on a designated stock exchange. Subsection 12.2(11) of the Act defines an "exempt policy" to have the meaning prescribed by regulation. In general, subsection 306(1) of the Regulations defines an "exempt policy" as a life insurance policy, other than an annuity contract, that satisfies certain conditions.
XXXXXXXXXX
2013-049374
G. Allen
July 19, 2013
Dear XXXXXXXXXX:
Re: RCA Subsection 207.5(2) Election
This is in response to your email sent June 18, 2013 concerning whether a retirement compensation arrangement (RCA) trust that only holds an exempt insurance policy at the end of a taxation year can make an election under subsection 207.5(2) of the Income Tax Act (the "Act"). The exempt insurance policy has a cash value and the underlying property of the exempt insurance policy consists of shares, bonds, mutual funds, etc.
Written confirmation of the tax implications inherent in particular transactions may only be provided by this Directorate where the transactions are proposed and are the subject matter of an advance income tax ruling submitted in the manner set out in Information Circular 70-6R5, "Advance Income Tax Ruling", dated May 17, 2002. This Information Circular and other Canada Revenue Agency ("CRA") publications can be accessed on the Internet at http://www.cra-arc.gc.ca/formspubs/menu-e.html. Nonetheless, we have provided some general comments below, which we hope will be of some assistance to you. However, as stated in paragraph 22 of the Information Circular, this opinion is not binding on the Canada Revenue Agency in respect of any particular situation.
In general, subsection 207.5(2) of the Act provides an alternative method for calculating an RCA trust's refundable tax at the end of a taxation year, where certain conditions apply. An election under subsection 207.5(2) is available where the only property held by an RCA trust at the end of the year consists of cash, debt obligations and shares listed on a designated stock exchange or any combination of such property. Where this is the case, subsection 207.5(2) permits the custodian of an RCA to make an election which results in the refundable tax for purposes of Part XI.3 of the Act to be deemed to be, in general, the total of: a) the amount of cash, b) the greater of the principal amount outstanding and the fair market value (FMV), of debt obligations, and c) the FMV of shares, held in the RCA trust at the end of the year.
Subsection 12.2(11) of the Act defines "exempt policy" to have the meaning prescribed by the Income Tax Regulations (the "Regulations"). In general, subsection 306(1) of the Regulations defines an "exempt policy" as a life insurance policy, other than an annuity contract, that satisfies certain conditions. Accordingly, where an RCA trust's only property at the end of a taxation year is an exempt insurance policy, an election under subsection 207.5(2) of the Act would not be possible.
Concerning RCA trusts investing in a life insurance policy that provides more than a nominal death benefit, we are of the view that this may constitute an "advantage" as defined in subsection 207.5(1) of the Act and result in the advantage tax under section 207.62 of the Act applying. In this regard, we would refer you to document 2013-0481421C6, question 7B of the 2013 Canadian Life and Health Association Conference where we provided our views concerning this issue.
We trust that our comments will be of assistance.
Yours truly,
Lita Krantz, CPA, CA
for Director
Deferred Income Plans Section II
Financial Industries and Trusts Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch
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