28 November 1991 Internal T.I. 912937 F - Dependant Life Insurance Premiums

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.

Re:  Dependant Life Insurance Premiums

This is in reply to the memorandum of October 22, 1991 from Mr. R. Cousineau in which we were asked to provide comments on the definition of "group term life insurance policy" in subsection 248(1) of the Income Tax Act (the Act) in relation to the situation where an employer pays for dependant coverage. The concerns relate to correspondence involving the St. John's District Office.

In a letter dated February 21, 1991 to         24(1)      the St.John's District Office indicated that where dependant coverage was mandatory, the policy would not satisfy the definition of "group term life insurance policy" in subsection 248(1) of the Act. Consequently, the amount paid under such a policy by an employer for coverage of an employee and his or her dependants would be taxable to the employee under paragraph 6(1)(a) of the Act and the $25,000 exemption in subsection 6(4) of the Act would not apply.

On the other hand, if the dependant coverage was optional, the premiums paid in respect of an employee's dependant would be taxable to the employee as a benefit under paragraph 6(1)(a) of the Act and the $25,000 exemption under subsection 6(4) of the Act would apply only to the employee's coverage.

In response to the above comments,    24(1)       in a letter dated March 15, 1991, raised additional concerns in respect of mandatory life insurance for dependants and requested further information in that regard.      24(1)        has indicated that dependant life insurance should be treated as a benefit separate and apart from employee coverage because it is subject to different underwriting and different premium rates.      24(1)       also mentioned that the effect of the interpretation provided by the District Office is that "family" employees would lose their $25,000 exemption whereas this would not be the case with respect to single employees. Furthermore, the effect of mandatory supplementary health insurance benefits would cause a group plan to lose its status as a "group term life insurance policy" as defined in subsection 248(1) since an amount would be payable to a person other than the group policy holder before the death or disability of the taxpayer (employee). In the event that this Department does not consider life insurance for dependants to be a separate benefit as a result of the above comments, we have been asked to comment on whether this result can be accomplished where the employer a) has a separate underwriter; b) has a different policy or division number; c) has a separate benefit description in the employee booklet; or d) makes the benefit optional.

Our Comments

In order to determine whether group term life insurance for employees and group term life insurance for dependants are covered in the same policy for the purposes of the definition of  "group term life insurance policy" in subsection 248(1), it is necessary to review the relevant documentation.  As no documentation has been provided to us, the following comments must be regarded as being of a general nature.

In the case where employee coverage and dependant coverage are provided for in the same policy and the dependant coverage is mandatory, it is our view that it is not possible to consider the dependant coverage as being separate from the employee coverage because only one policy is involved.  In addition, both of these two types of benefits involve life insurance and we consider the dependant's coverage and the employee's coverage to be associated with each other as a result of the mandatory feature in respect of dependant coverage. Accordingly, the dependant coverage would be considered to be a part of the policy for the purposes of the definition of "group term life insurance policy" in subsection 248(1).  In relating these comments to this definition, it states in part, "... a group life insurance policy under which no amount is payable to a person other than the group policy holder ... before the death or disability of the taxpayer."  Therefore, where dependant coverage is automatic, a payout in the event of a dependant's death would be made to a person (the employee, assuming he is the beneficiary) other than the policyholder (the employer) before the death or disability of the taxpayer (the employee).  It would follow that the total amount of the premium paid in respect of the policy by the employer would be a taxable benefit to the employee pursuant to paragraph 6(1)(a) of the Act.

On the other hand, where dependant coverage is optional and the premiums in respect of the employee and dependant coverage are accounted for separately (as though under separate policies), we are prepared to view the coverage in respect of the dependants as not being coverage under a policy which would otherwise be considered a "group term life insurance policy".  In such cases, we are of the opinion that the amount of the employer's contribution towards dependant coverage would constitute a taxable benefit to the employee pursuant to paragraph 6(1)(a) of the Act. The amount of insurance payable in the event of the dependant's death would not be taken into account in the determination of a benefit under subsection 6(4) of the Act to the employee. Where an insurance policy provided for group term life insurance as well as mandatory health insurance, which we assume is a private health services plan as defined in subsection 248(1) of the Act, the premiums in respect of the life insurance and health benefits are normally identified separately as suggested by        24(1)  In addition, it appears to us that there would be no interconnection between the two types of benefits.  In such circumstances, the Department should not disqualify the group life insurance provisions from meeting the definition of group term life insurance policy in subsection 248(1) of the Act by virtue of the private health services plan.

Since the term "group term life insurance policy" is defined in subsection 248(1) "in respect of a taxpayer", it is possible for a term life insurance policy in respect of a "single" employee to satisfy that definition whereas that would not be the case for a "family" employee where automatic coverage in respect of dependants is provided.

Our comments on the alternative courses of action proposed by are set out below:

a)        In the event that separate underwriters were to be used with respect to term life insurance for employees and term life insurance for dependants, it appears to us that separate policies would normally be involved.  On the basis that this is the case, such an arrangement would not prevent the term life insurance in respect of employees from satisfying the definition of "group term life insurance policy" in subsection 248(1) notwithstanding that dependant coverage was mandatory under the separate policy.  It is also our general view that if separate divisions were included in an insurance contract for employee and dependant coverage, the term life insurance coverage for the employees may be considered to be a separate policy for the purposes of the definition of group term life insurance policy" in subsection 248(1).  However, there must not be any interconnection or interlacing between the two divisions.  Similarly, it is our view that if a separate policy for employees and a separate policy for dependants were to be executed with the same, underwriter, it is our general view that the policy for employee coverage would be considered to be a separate policy for the purposes of the "group term life insurance policy" definition.

b)        The fact that coverage for employees and coverage for dependants are each described separately in an employee booklet would not, in our view, be relevant for the purposes of determining whether coverage for employees can be considered to involve a "group term life     insurance policy" as defined in subsection 248(1).

c)        Comments on optional coverage for dependants have been set out above

As a final comment, you could indicate to       24(1)    that if they are concerned with a proposed transaction, this Directorate would be pleased to consider an advance income tax ruling request submitted in accordance with Information Circular 70-6R.

Should you require any further technical assistance, we would be pleased to provide our views.

B.W. DathDirectorBusiness and General DivisionRulings DirectorateLegislative and Intergovernmental Affairs Branch