6 May 1993 External T.I. 9300635 F - Amendment of Group Life Insurance 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.

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Attention:  XXXXXXXXXX

Dear Sirs:

RE:  Special Terminal Illness Benefit Under Group Life Insurance Policies

We are writing in reply to your letter dated January 4, 1993 requesting our views on the treatment under the Income Tax Act (the "Act") with respect to the amendment of a group life insurance policy to add a special terminal illness benefit provision.

In connection with your request, you have enclosed a copy of the standard form of group life insurance policy which you have issued as well as a copy of a draft special terminal illness benefit provision which you intend to add thereto. In so doing, you refer to previous Departmental correspondence which indicated that definitive comments could not be made without reference to a specific policy and the proposed amendment.

It appears that there may be some confusion but to clarify, the Department may provide general comments in connection with hypothetical situations but such comments are not binding on the Department and may not necessarily apply in the context of a specific situation (and our replies will so state). In the case of a proposed transaction, the Department will provide its comments but only where the proposal is seriously contemplated by the taxpayer and only by way of an advance income tax ruling, based on the actual facts and proposals involved in the specific situation.

Should you wish to proceed on this basis, an advance ruling would entail our review of the existing policy of the particular taxpayer(s) involved, the specific proposed amendment and a request prepared in accordance with Information Circular 70-6R2. Meanwhile, we offer the following general comments.

An amendment to a group life insurance policy to provide for a disability option under which a special benefit payment would be made in cases of an insured who is suffering from a terminal illness and has received medical certification that death will occur within twelve months of receiving the special benefit payment would not, in itself, appear to be of such a fundamental nature as to result in a disposition of an interest in the policy by the policyholder or the insured, where:

-     the amount of the death benefit under the policy prior to amendment is reduced by the amount of the special payment but is not otherwise altered, and

-     this does not result in any additional cost to the policyholder or the insured.

With respect to the nature of such a special benefit payment, it would appear that it could constitute a "policy loan" as defined in paragraph 148(9)(e) of the Act. As such, pursuant to subparagraph 148(9)(c)(ii) of the Act, such a payment could give rise to a disposition in relation to an interest in the policy. However, to the extent that a group life insurance policy has no cash surrender value, the "proceeds of the disposition", as defined in subparagraph 148(9)(e.2)(ii) of the Act, would be nil and such a payment would thus not be taxable when received by the insured.

If such a payment is not repayable, it is also possible that it could constitute a disability benefit under the policy which, by virtue of subparagraph 148(9)(c)(vii) of the Act, would not be a disposition in relation to an interest in the policy and would therefore not be taxable when received by the insured.

The foregoing is an expression of opinion only and may not necessarily be applicable in the context of a particular situation; nevertheless, we hope this will be of assistance to you.

Yours truly,

for DirectorFinancial Industries DivisionRulings Directorate