9 June 1993 Internal T.I. 9313217 F - Life Insurance RCA's

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.

June 9, 1993

Attn:  Ms Carole Roy

XXXXXXXXXX

Retirement Compensation Arrangement (RCA) Account Nos.: XXXXXXXXXX

This is in reply to your round trip memorandum of April 28, 1993, concerning the above-noted subject. You enclosed with your memorandum copies of correspondence received from XXXXXXXXXX dated April 1 and April 7, 1993, and December 3, 1992, and copies of the 1991 T3-RCA Returns for the above-noted accounts.

The three account numbers relate to three life insurance policies held by XXXXXXXXXX on the lives of three of its employees. Due to the operation of subsection 207.6(2) of the Income Tax Act (the "Act"), these three insurance policies are each deemed to be RCA's with the tax consequences as outlined in paragraphs (a) through (d) of that provision.

XXXXXXXXXX, in the letter of April 1, 1993, states that it is their position that a policy dividend under the policy used annually to purchase paid-up insurance does not result in a distribution under the RCA to the employer, nor a contribution by the employer under the RCA. There is no support offered for this position but a reference to a telephone conversation with one of our officers.

The policy dividend is the property of the employer and the employer's direction or consent is required before it can be used to purchase additional insurance. Consequently, it is our view that the use of a policy dividend by the employer to purchase paid up insurance constitutes both a "payment received in respect of the interest" under paragraph 207.6(2)(d) and a "premium paid in respect of the interest" under paragraph 207.6(2)(c) of the Act.

As a result, the policy dividend is deemed to be:

(1)     an amount received out of or under the RCA by the recipient and, therefore, included in the employer's income pursuant to paragraph 12(1)(n.3) of the Act. Such an amount is also a distribution which will trigger a refund of tax - paragraph 207.5(1)(c) definition of "refundable tax"; and

(2)     a contribution under the RCA equal to twice its amount and subject to Part X.3 tax.

As a contribution it is, of course, deductible by the employer under paragraph 20(1)(r) of the Act.

We trust this clarifies our position. If XXXXXXXXXX wishes to submit further argument on this point, we would be pleased to consider it.

for DirectorFinancial Industries DivisionRulings Directorate