25 March 1987 Income Tax Severed Letter 5-2610 - [Split Dollar Insurance]

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.

A. Jane Tel: (613) 957-2126

March 25, 1987

XXXX

Re: Split Dollar Insurance

This is in reply to your letter of December 9, 1986 regarding the taxability of a split dollar insurance program in the following situation:

1. Mr. "A" is a key employee, non-shareholder of "x" Co.

2. Mr. "A" acquires a life insurance contract which he immediately assigns to himself and "X" Co. jointly.

3. Mr. "A" is the life insured on the policy and his estate is the beneficiary. "X" Co. is the sole owner of the policy's cash surrender value.

4. The parties agree in writing to share the annual premium payments under the policy by "X" Co. paying the lesser of the premium and the annual increase in the policy's cash surrender value and by Mr. "A" paying the remainder, if any. The net effect of this arrangement is that Mr. "A" will pay the bulk of the premium in the early years of the policy with his portion steadily decreasing and within about seven or eight years the entire premium will be assumed by "X" Co.

5. Instead of paying cash dividends, the dividends in the policy are used to acquire term insurance. This term insurance is issued in the name of "X" Co. and the amount of the term insurance is equal to the cash surrender value of the whole life policy.

6. On Mr. "A's" death term insurance equal to "X" Co.'s cash surrender value in the whole life policy is paid to "X" Co. The face amount of the whole life policy is paid to "A's" estate.

You request our opinion in respect of the following questions:

1. Has Mr. "A" received a benefit from employment which is taxable under paragraph 6(1)(a) of the Act?

2. If so, how is the benefit calculated?

3. Would the amount of the benefit, if any, be deductible by "X" Co.?

4. Would our answers change if Mr. "A" were a controlling shareholder of "X" Co.?

The Department's position with respect to split dollar life insurance policies is that there may be either a paragraph 6(1)(a) benefit, for employees, or a subsection 15(1) benefit, for shareholders, in each year of the policy. The benefit includes an amount equal to the excess of the amount of the premiums paid by the corporation in respect of the year over the increase in the cash surrender value of the policy during the year. In the case of an employee a deduction from income is allowed to "X" Co. in respect of the amount of the benefit described above, provided the amount is reasonable in the circumstances.

Generally, we do not consider the individual whose life is insured under a split dollar insurance policy to be in receipt of a benefit in respect of the increase in the cash surrender value attributable to the premiums paid by the corporation. However, this position applies only where the corporation pays premiums equal to the annual increase in the policy's cash surrender value and the corporation is entitled to the cash surrender value of the policy on its termination or to a portion of the amount payable under the original policy on death equal to its cash surrender value immediately before death as well as to the dividends that arise in connection with the policy (or anything substituted therefore).

In the type of policy you describe where Mr. "A's" estate is entitled to all of the original policy with no portion thereof payable to "X" Co., in our view, Mr. "A" is in receipt of an additional benefit, that is, the increase in the cash surrender value attributable to the premiums paid by "X" Co. Thus, in order to be on side with the Department's position with respect to a split dollar policy, it is our view that on Mr. "A's" death the corporation must be entitled to a portion of the amount payable under the original policy equal to the cash surrender of that policy immediately before death as well as to the dividends or to the face amount of any term life policies purchased with the dividends.

On Mr. "A's" death the proceeds under the policy to the beneficiary of Mr. "A" would be tax free providing the policy is an exempt policy as described in section 306 of the Income Tax Regulations. If the policy is not exempt then Mr. "A" will be deemed, pursuant to paragraph 148(2)(b) of the Act, to have disposed of his interest in the policy immediately before death and, pursuant to subsection 148(1) of the Act, the amount by which the proceeds of his interest in the policy exceeds the adjusted cost basis of his interest in the policy will be included in the calculation of his income for the taxation year ending on the date of his death.

The income tax consequences discussed above would not in our view change if Mr. "A" were a controlling shareholder of "X" Co.

We trust this will be of assistance.

Yours truly,

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

AJ/md