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: Whether some transactions occurring after March 20, 2013, with respect to a "leverage insured annuity" (LIA) entered into before March 21, 2013 will impact its grandfathered status?
Position: Mixed question of fact and law.
Reasons: Need to determine if a person or a partnership has become obligated, after March 20, 2013, to repay an amount to another person or partnership at a time determined by reference to the death of a particular individual whose life is insured under the life insurance policy.
CALU CRA Roundtable May 2014
Question 1 - LIA Policies
Background
Changes resulting from Budget 2013 have eliminated many of the tax benefits associated with leveraged insured annuities (LIA). This has been accomplished by introducing special rules for "LIA policies".
For taxation years that end after March 20, 2013, a life insurance policy (other than an annuity) is an "LIA policy" as defined in subsection 248(1) of the Income Tax Act ("Act") if certain conditions are met.
The first condition is that a particular person or partnership becomes obligated after March 20, 2013 to repay an amount to another person or partnership ("lender") at a time determined by reference to the death of a particular individual whose life is insured under the life insurance policy.
The second condition is that the lender is assigned an interest in the life insurance policy, and in an annuity contract the terms of which provide that payments are to continue for a period that ends no earlier than the death of the particular individual.
The Explanatory Notes released with the final legislation indicate that "An LIA policy does not include a policy in respect of which the amount of borrowings outstanding as of March 21, 2013 does not increase on or after that date."
Question
Can the CRA confirm that the following transactions occurring after March 20, 2013, with respect to an LIA entered into before March 21, 2013, will not impact its "grandfathered status"?
1. Extending the duration of the loan with the same lender without any increase in the amount of borrowings outstanding as of March 20, 2013.
2. Replacing and extending the loan with a new lender without any increase in the amount of borrowings outstanding as of March 20, 2013.
3. Making modifications to the terms of repayment or interest rate charged on the loan, without any increase in the amount of borrowings outstanding as of March 20, 2013.
4. Borrowing an additional amount from the current lender which in combination with existing borrowings does not exceed the amount of the borrowings outstanding as of March 20, 2013.
5. Replacing the insurance policy with a new insurance policy as security for the borrowing, without any increase in the amount of borrowings outstanding as of March 20, 2013.
CRA Response
Paragraph (a) of the definition of "LIA policy" in subsection 248(1) sets out the condition that a particular person or partnership becomes obligated after March 20, 2013 to repay an amount to another person or partnership at a time determined by reference to the death of a particular individual whose life is insured under the life insurance policy.
The question of whether a person or partnership becomes obligated after March 20, 2013 to repay an amount to the lender is a mixed question of fact and law. However, it is our view that if a new loan comes into existence after March 20, 2013, then the person or the partnership has become obligated after that date to repay an amount.
Consequently, where a loan is replaced, after March 20, 2013, by a loan with a new lender, regardless of whether there is an increase or decrease in the amount of borrowing outstanding as of March 20, 2013, it is our view that the loan with the new lender is a new loan and therefore the person or the partnership has become obligated after that date to repay an amount.
When the terms of a loan agreement are changed after March 20, 2013 without increasing the amount of borrowings as of March 20, 2013, one needs to determine if because of the changes to the terms of the loan agreement the person or partnership became obligated to repay an amount after March 20, 2013. When the changes do not create a new loan agreement, it is our view that the person or the partnership has not become obligated after that date to repay an amount. A change in the interest rate, an extension of the duration of loan or a change to the terms of repayment may not, in and of itself, result in a new loan. Such a determination can only be made after a review of the terms of the particular loan agreement.
Also, it is our view that the borrowing of an additional amount from the current lender would cause a person or a partnership to be obligated, after March 20, 2013, to repay an amount within the meaning of paragraph (a) of the LIA policy definition. This would be the case even if the combination of borrowings does not exceed the amount of the borrowings outstanding as of March 20, 2013.
Finally, where a life insurance policy was assigned as security to the lender prior to March 21, 2013 and it is then replaced with a new life insurance policy after that date, it is our view that this fact, in itself, will not jeopardize the grandfathered status of an LIA policy. The new life insurance policy is an LIA policy if all the conditions in the LIA policy definition are met.
Catherine Ayotte
2014-052326
May 6, 2014
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