16 September 1993 External T.I. 9322475 F - RCA - 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.

XXXXXXXXXX 

Attention:  XXXXXXXXXX

Dear Sirs:

This is in reply to your letter of July 29, 1993 requesting our views concerning an arrangement involving the acquisition of an exempt life insurance policy to fund retirement benefits, with the policy premiums being split between an employer and an employee.

You describe in your letter a set of facts related to a sample agreement. Written confirmation of the tax implications inherent in a particular set of facts is given by this Directorate only where the facts relate to a proposed transaction that is the subject matter of an advance ruling request submitted in the manner set out in Information Circular 70-6R2. Where the facts relate to a completed transaction, the enquiry would be addressed by the relevant District Taxation Office. We offer, however, the following general comments.

Where retirement benefits are to be funded by an insurance policy and an employer acquires an interest in the policy, the policy and all relevant documentation would have to be reviewed to determine if that interest may reasonably be considered to have been acquired to fund, in whole or in part, those benefits. In our view, the fact that the employer's share of the premiums under the policy would represent only the pure cost of term insurance would not of itself necessarily decide the issue. For example, if the employee's share of the premiums under the policy are less than would be required to fund similar retirement benefits under a policy where the employee paid all the premiums, it would seem reasonable to conclude that the employer's share of the premiums would be funding at least part of the retirement benefits. If so, the employer's interest in the policy would in our view be deemed to be the subject property of a retirement compensation arrangement ("RCA") by reason of subsection 207.6(2) of the Income Tax Act.

To the extent that a bonus paid to an employee is reasonable in the circumstances, it would be deductible in computing the income of the employer. Where an amount is paid by an employee on behalf of an employer and the employer subsequently reimburses the employee, the reimbursement would normally not be income to the employee.

Death benefits received under an exempt life insurance policy are normally not taxable by reason of subparagraph 148(9)(c)(ix) of the Income Tax Act. However, where the death benefits are received in respect of an interest in the policy that is deemed under subsection 207.6(2) of the Act to be subject property of an RCA, the amount of the death benefits would be required to be included in income by reason of paragraph 207.6(2)(d) of the Act.

Where a policyholder is entitled to policy dividends, subsection 148(2) of the Act provides that he shall be deemed to have disposed of an interest in the policy and to have become entitled to receive proceeds of the disposition equal to the amount computed under that subsection. Generally speaking, until such amount exceeds the adjusted cost basis to the policyholder of his interest in the policy, subsection 148(1) of the Act provides that no amount is required to be included in income. However, where the policy dividends relate to an interest in the policy that is deemed under subsection 207.6(2) of the Act to be subject property of an RCA, the dividends would be required to be included in income from the outset by reason of paragraph 207.6(2)(d) of the Act.

Our comments are an expression of opinion only and are not binding on the Department as explained in paragraph 21 of Information Circular 70- 6R2. We trust, however, that they are of assistance.

Yours truly,

for DirectorFinancial Industries DivisionRulings Directorate