8 July 2020 CALU Roundtable Q. 8, 2020-0842281C6 - Folios on Life Insurance Dispositions

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: What is the status of the Income Tax Folios that will replace IT-430R3 and IT-87R2?

Position: IT-430R3 will not be replaced with an income tax folio. We are currently working on the income tax folio that will update and replace IT-87R2, as resources permit.

Reasons: Income Tax Folio S3-F2-C1, Capital Dividends covers all of the components on the capital dividend account, including the life insurance component. The life insurance component covers information that was in IT-430R3 and has been updated. It was considered to be an inefficient use of resources to create a separate folio to deal with a single component of the capital dividend account. The general information contained in IT-87R2 is considered to be of relevance to a broad audience so we are committed to publishing an income tax folio that will contain updated content on the topics covered in IT-87R2.

2020 CALU CRA Roundtable – July 2020

Question 8 – Tax Folios on Life Insurance Dispositions

Background

At the CALU 2014 CRA Roundtable (Question 2) CALU noted that the Income Tax Rulings Directorate (ITRD) had started to update and improve the technical content contained in Interpretation Bulletins through the creation of a new technical tax publication called Income Tax Folios. At that time responsibility for drafting certain Folio chapters had been assigned to external accounting and legal firms. CALU asked the CRA to comment on the then current priorities for updating technical information, and how the outsourcing of certain chapters has been proceeding.

The CRA responded that “[t]he Income Tax Folios were launched on March 28, 2013 with the publication of the first eleven Chapters. Since that time, numerous updates related to legislative amendments and emerging interpretive provisions have been made to these published Chapters. As well, Rulings officers are working on nineteen additional Chapters, which are in various stages of completion. Each Chapter will be published as soon as it is completed. The Folios are definitely a priority in the Directorate’s already demanding workload. In 2013, the Directorate also undertook a pilot project coordinated with the assistance of the Canadian Tax Foundation and the (then) Canadian Institute of Chartered Accountants. Under this pilot project, seventeen chapters were allocated to tax professionals in leading law and accounting firms. We are not yet in a position to evaluate the pilot program but look forward to doing so in the coming months.”

Question

Can the CRA provide an update on the Tax Folios project and, in particular, comment on the status of a Tax Folio that would replace archived IT-87R2 (Policyholder Income from Life Insurance Policies) and IT-430R3 (Life Insurance Proceeds Received by a Private Corporation)?

CRA Response

Income Tax Folios provide important technical and interpretive information on specific income tax topics and the related provisions of the Income Tax Act. To date, the CRA has published 42 Income Tax Folios on a variety of topics and has published numerous updates to these Folios. The Folios are an important part of ITRD’s workload and we continue to work on publishing new ones as well as updating Folios that are already published.

The process of writing and updating Folios is very resource-intensive. It requires extensive research and detailed technical analysis of complex issues, along with consultations within the CRA and with other government departments before each folio is published.

During 2018 and early 2019, the CRA carried out a review of the overall Folio process and the related work in progress. As part of that review, we considered the fact that Folio S3-F2-C1, Capital Dividends, published December 16, 2016, contains information reflected in IT-430R3. It provides a discussion of the capital dividend account of a private corporation and includes, at paragraphs 1.59 to 1.72, a discussion on the life insurance proceeds element of the capital dividend account and comments on the treatment of life insurance proceeds paid directly to a creditor. An updated version of Folio S3-F2-C1, was published in July of 2019 to reflect legislative amendments impacting paragraphs 1.59 to 1.72. It was determined that because the published Folio provides information on a broader scale with respect to capital dividends (including the life insurance component), it would not be an efficient use of resources to prepare a separate Folio dealing only with the life insurance component. In addition, it has been our experience that the most significant issues associated with the CDA in the context of life insurance proceeds involve tax planning, a subject matter that is outside the scope of a Folio. For these reasons, the CRA will not be completing a separate successor Folio specific to IT-430R3. The CRA will, however, continue to update Folio S3-F2-C1, as needed, on matters involving capital dividends in the context of life insurance proceeds received by a private corporation.

As resources permit, ITRD continues to work on the Folio that will replace IT-87R2. We are committed to publishing a Folio that will provide general tax information to policyholders of life insurance policies. Any discussion of tax planning arrangements involving the use of life insurance policies will be outside the scope of the Folio.

Alison M. Campbell
July 8, 2020
2020-084228