21 January 2025 External T.I. 2024-1041441E5 - Return of Premium Life Insurance Policy

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: We were asked to provide comments on the taxation of a return of premium payment made to a taxpayer by a life insurance company upon the maturity of a term life insurance policy.

Position: General comments provided.

Reasons: Legislation.

XXXXXXXXXX							Alison M. Campbell
								2024-104144

January 21, 2025

Dear XXXXXXXXXX:

Re: Life Insurance Policy – Return of Premium Benefit

We are writing in response to your correspondence dated October 27, 2024, in which you requested our comments on why you were issued a T5 Slip from an insurer with respect to an amount you received upon the maturity of a term life insurance policy. In your correspondence, you describe that you received the amount on the maturity of a 20-year term policy that included a return of premium option.

Our Comments

This technical interpretation provides general comments about the provisions of the Income Tax Act (Act) and the Income Tax Regulations (Regulations). It does not confirm the income tax treatment of a particular situation involving a specific taxpayer but is intended to assist you in making that determination. The income tax treatment of particular transactions proposed by a specific taxpayer will only be confirmed by this Directorate in the context of an advance income tax ruling request submitted in the manner set out in Information Circular IC 70-6R12, Advance Income Tax Rulings and Technical Interpretations.

Life insurance

The taxation of life insurance products can be complex due to the wide variety of products available in the marketplace, many of which are structured to meet individual preferences and needs. Generally, under a life insurance policy that includes a return of premium option, the insurer provides two benefits in exchange for the premiums paid by the policyholder. The first benefit provided by the insurer is a right for the named beneficiary to receive a death benefit if the individual insured under the policy dies during the period that the policy is in force. The second benefit provided by the insurer is a right to receive an amount from the insurer if the individual insured under the policy is still living at the time the policy matures. This second benefit is commonly referred to by insurers as a return of premium benefit.

Disposition

A “disposition” of an interest in a life insurance policy is defined in subsection 148(9) of the Act to include a “surrender thereof” or “the dissolution of that interest by virtue of the maturity of the policy”. When a life insurance policy is surrendered or matures (i.e., disposed), paragraph 56(1)(j) and subsection 148(1) of the Act require the policyholder to include in income a policy gain computed as the amount, if any, by which the “proceeds of the disposition” exceeds the “adjusted cost basis” of the policy immediately before the disposition.

Proceeds of the disposition (PoD)

The PoD of an interest in a life insurance policy is defined in subsection 148(9) of the Act as the amount of the proceeds that the policyholder is entitled to receive on the disposition. Where the terms of a policy provide for a benefit, such as a return of premium benefit, to be paid out on the surrender or maturity of the policy, such benefit would be included in the computation of the proceeds received by the policyholder.

Adjusted cost basis (ACB) and net cost of pure insurance (NCPI)

The ACB of a life insurance policy is determined by a formula set out under subsection 148(9) of the Act. In general terms, the ACB to an original policyholder is the amount by which the cash premiums paid by the policyholder, and any income in respect of the policy that has previously been reported for tax purposes, exceeds an amount referred to as the “net cost of pure insurance” (NCPI) under the policy.

Section 308 of the Regulations sets out the rules for calculating the NCPI of a taxpayer's interest in a life insurance policy. The NCPI is determined by the insurer by referring to standard mortality assumptions and approximates the cost of the pure insurance coverage under the policy for the year. In general terms, the NCPI represents the cost the policyholder has paid for the insurance coverage during the time that the policyholder held the policy and, as such, reduces the ACB amount that can be returned to the policyholder on a tax free basis when the policy is surrendered or matures.

Reporting requirements

Subsection 217(2) of the Regulations requires an insurer that is the issuer of a life insurance policy to prepare an information return in prescribed form (i.e., T5 information return and a T5 slip) to report the amount that is required to be included in computing a policyholder's income under paragraph 56(1)(j) of the Act in respect of a disposition of an interest in the policy if the insurer is a party to, or is notified in writing of, the disposition. The insurer with whom the policy was held prior to its maturity or surrender would report the amount of the policy gain from the disposition in “Box 14- Other income from Canadian sources” of the T5 slip issued to the policyholder.

The determination of the amounts that are used to compute any policy gain with respect to a life insurance policy disposition (e.g., PoD, ACB, NCPI) generally requires information that is available only in the accounts of the insurer.

Finally, we refer to you the Tax Court of Canada judgement White v. The Queen (2008 TCC 414), accessible by the public at the following weblink https://decision.tcc-cci.gc.ca/tcc-cci/decisions/en/item/28788/index.do, which provides general comments on term policies with a return of premium benefit as well as the related tax consequences of amounts received as a return of premium on the maturity or surrender of such policies.

We trust that these comments will be of assistance.

Yours truly,

Bob Naufal
Manager
Financial Institutions Section
For Director
Financial Industries and Trusts Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch