12 June 1986 Income Tax Severed Letter 5-1373 - [Exemption Test 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.

G. Thornley (613) 957-2130

June 12, 1986

Dear Sirs:

Re: Exemption Test Policy

This is in reply to your letter of April 4, 1986 concerning the calculation of the exemption test policy in connection with a "universal life policy" which in your words "must be qualified as 'exempted' during the active life of the policy".

As the matters on which you have asked us to comment are essentially questions of fact rather than interpretations of the law we have adopted a general approach in our reply. If after reviewing our comments you have a specific question about the application of section 306 of the Income Tax Regulations (the "Regulations") to a particular situation we suggest you write again setting out as much detail as possible.

Our comments

The determination of whether a policy represents one policy or more than one policy is a question of fact. However, for purposes of the accrual rules, the references in section 12.2 of the Act are to a taxpayer's interest in "a policy". For purposes of Regulation 306, where there is a permanent life insurance policy owned by the primary insured to which riders attach (whether or not they are issued coincidentally with the primary policy), there is only one actual policy. A separate exemption test policy ("ETP") will be deemed to have been issued to the policy holder in respect of that life insurance policy on the date of its issue. If the riders are issued coincidentally with the primary policy, the ETP will reflect the total benefit on death of the combined policy. If only the primary policy is issued initially, then the ETP will reflect only the benefit on death of the primary policy or the date of its issue. Where the amount of the benefit on death is increased subsequently by the addition of riders, for example, riders covering other members of the family, and on a policy anniversary the amount of the initial benefit and the addition exceeds 108% of the amount of the benefit on death on the later of the date of issue of the policy or the date of the previous anniversary, an additional ETP will be deemed to be issued for the excess benefit on death over the 8% added to the original ETP.

By way of example, assume a taxpayer has a "Universal" policy of $100,000 ("the basic policy") and by the end of year 3 the policy has accumulated funds therein amounting to $5,000. The benefit on death is the face amount of the policy plus the accumulated funds. A rider of $20,000 covering the spouse is added in year 4. As this rider increases the policy's benefit or death by more than 8% an additional ETP is deemed to have been issued. The ETP of the basic policy will be increased to $113,400 (105,000 + (8% X 105,000) = 113,400) on the next anniversary date and the ETP of the spouse's rider will be $11,600. On any anniversary date the sum of these ETP benefits on death ($113,400 + 11,600 = $125,000) is always equal to all the benefits payable on death under the actual policy.

The above comments generally apply only to an interest in a life insurance policy acquired after December 1, 1982. However, subsection 12.2(10) of the Act in effect provides that where any rider providing additional life insurance is added after December 1, 1982 to a life insurance policy last acquired before December 2, 1982, the rider portion of the policy is subject to the accrual rules and is treated as a separate policy with its own accumulating fund and its own ETP.

With respect to the accumulated funds vis-a-vis the death benefit of a policy, whether or not they are apportioned between the principal policy and a rider can only be determined from a review of the terms of the policy.

With respect to the adjusted cost basis (ACB) of the policy, paragraph 148(9)(a) of the Act provides that one amount be computed in respect of the interest of a "policyholder" in a life insurance policy. It does not provide that the ACB to the policyholder of a particular policy car be subdivided.

Whether or not there is more than one "policyholder" in a multiple lives policy is also a question of fact to be determined from a review of the terms of the policy.

We trust our comments will prove helpful.

Yours truly,

ORIGINAL SIGNED BY Wm. R. McColm

for Director Reorganizations and Non-Resident Division Specialty Rulings Directorate Legislative and Intergovernmental Affairs Branch