11 July 1990 Ministerial Letter 900718 F - Special Benefit Payment to Terminally Ill Policyholders

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.

19(1)

This is in reply to your letter of May 4, 1990 concerning the taxation of special benefit payments to policyholders suffering from a terminal illness made out of their existing life insurance policies.

Our comments which follow are restricted to those situations where the policyholder is suffering from a terminal illness and has received medical certification that death will occur within 12 months of receiving the special benefit payment.

As indicated to you in our letter dated February 8, 1990 it should be possible to amend a life insurance policy to add a disability option without triggering a disposition of the policy where the policy already provides for early withdrawals.

In situations where the policy does not provides for early withdrawals an amendment to a policy to provide for a disability option which does not alter the amount of the death benefit under the policy and does not result in any additional cost to the policyholder for such an endorsement would not in itself seem significant enough to result in a disposition of an interest in the policy.

We also reviewed the characterization of these special benefit payments at the time such payments are made. The definition of "policy loan" provided for in paragraph 148(9)(e) of the Income Tax Act ("Act") is broad enough to include such special benefit payments. As you are aware a disposition under paragraph 148(9)(c) of the Act includes a policy loan. However, it is our view, that provided such payments are not repayable they would also fall within the exclusion provided for under subparagraph 148(9)(c)(vii) of the Act for disability payments. Consequently in our opinion such special benefit payments would not be taxable when received by the policyholders.

As we indicated to you previously our comments are of a general nature and therefore do not constitute an advance income tax ruling that is binding upon the Department in respect of a particular situation. Should you be concerned with any particular situation or wish our specific comments with respect to any particular situation it will be necessary for us to review the terms of the particular policy and the proposed amendment.

We hope this is of assistance to you.

Yours truly,

F. Lee Workman Financial Industries Division Rulings Directorate