25 October 1990 Ruling 900841 F - Deductibility of Single Premium for Paid-up Group Term 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.

October 25, 1990

Dear Sirs:

Re:  Deductibility of Single Premium for Paid-Up Group Term Insurance

This is in reply to your letter of May 10, 1990 wherein you requested our opinion on the deductibility to an employer of the cost of purchasing a single premium, paid-up, group term insurance policy. We apologize for the delay in our response to your letter.

As we understand it, some employers prefer to discharge their financial obligation to retiring employees in respect of group term insurance in effect at the time of retirement rather than continue to make annual payments for such insurance out of future revenues. You indicated in your letter that proposed amendments to the standards of financial accounting in the United States may soon require such pre-funding a further indication that this practice may become wide-spread.

One method of pre-funding such liabilities is to purchase a paid-up insurance policy upon an employee's retirement. Under such an arrangement the employer would pay a single premium to an insurance company to provide life insurance at a prescribed level for the retire until death or a specified age. The paid-up policy would have no cash value and the single premium would not be refundable. You have asked whether or not the premium for purchasing such a policy would be deductible in the year the payment is made to the insurance company.

Our Comments

Subparagraph 18(9)(a)(iii) of the Income Tax Act states in its context, that:

     "Notwithstanding any other provision of this Act ... no deduction shall be made in respect of on outlay or expense to the extent that it can reasonably be regarded as having been made or incurred ... as consideration for insurance in respect of a period after the end of the year (other than an amount paid in respect of reinsurance by an insurer)".

In our view, this provision would restrict the amount in respect of the payment of a single premium to purchase an insurance policy in the above circumstances to the amount paid in respect of coverage for the year in question. In each future year, paragraph 18(9)(b) of the Act would permit a deduction in that year of the part of the single premium that relates to coverage in that year.

We trust that the above comments clarify the Department's position in the matter.

Yours truly,

for DirectorBusiness and General DivisionRulings DirectorateLegislative and Intergovernmental Affairs Branch