14 June 1994 External T.I. 9409775 - SINGLE PREMIUM ON A GROUP TERM LIFE INSUR FOR RETIRE

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.

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the Department.

Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle du ministère.

Principal Issues:

single premium group term life insurnance policy-limitations on employer's deduction & the calculation of the benefit for employee

Position TAKEN:

employer's deduction is restricted yet employee's taxable benefit on coverage in excess of $25,000 is based on entire premium paid in the year (no comment given on budget comments because legislation not yet introduced)

Reasons FOR POSITION TAKEN:

-18(9)(a) prohibits a deduction for that portion of the premium which can reasonably be considered applicable to a future year (i.e. any portion in excess of the equivalent annual premium
-for taxable benefit purposes, even though the premium can be considered to be in respect of future years as well as the current year, the benefit is based on the total premium paid in the year (see para 5 of IT227

A. Humenuk
XXXXXXXXXX 940977

Attention: XXXXXXXXXX

June 14, 1994

Dear XXXXXXXXXX:

Re: Single Premium Group Term Life Insurance Policy

We are replying to your letter of April 11, 1994 concerning the deductibility of premiums paid by an employer for paid up group term life insurance upon the termination of an individual's employment and the taxation of the benefit so conferred on that employee or former employee.

You ask whether subparagraph 18(9)(a)(iii) of the Act will restrict the employer's deduction in respect of a single premium paid for such coverage either in the situation where the coverage is obtained during the ongoing employment of an employee, upon the retirement of an employee or as a result of an extraordinary event such as a plant shut down. In the event the employer is not entitled to a deduction for the full amount of the premium paid in the year, you ask what method of allocation to subsequent taxation years would be appropriate for claiming the portion of the premium not deductible in the year paid. You also ask for clarification of the manner of calculating any taxable benefit relating to such coverage.

As stated in paragraph 5 of Interpretation Bulletin IT-227R "Group Term Life Insurance Policies", where the entire premium for a group term life insurance policy is paid in the first policy year, the whole premium can be considered to apply to the current year as well as to future years. Nevertheless, it is our view that subparagraph 18(9)(a)(iii) of the Act prohibits the deduction of amounts which can be considered to be payable in respect of future taxation years. In our view, any amount in excess of the annual premium that would otherwise be payable for that same coverage can be considered to be payable in respect of a future year and thus would not be deductible in that taxation year. In each future year, paragraph 18(9)(b) of the Act permits a deduction for that part of the premium which was not deducted in a previous year and which relates to coverage in that year.

We are unable to provide any assistance in determining a reasonable allocation of the balance of the premium over future years without a review of the particular policy and the method by which the single premium was determined. With respect to your two suggestions for determining the amount of premium applicable to a specific future year, we must advise you that we have not set any administrative thresholds for permitting an employer either to deduct a specific amount or to deduct the premiums over a specific period of time.

With respect to the calculation of the taxable benefit for group term life insurance coverage of less than $25,000 provided by the employer, present legislation does not require the benefit to be included in income. With respect to coverage in excess of $25,000, we refer you to paragraph 5 of Interpretation Bulletin IT-227R in which we state that the annual taxable benefit for coverage in excess of $25,000 is based on the total premium payable in the year even though the premium could be considered to be in respect of both the current policy year and all subsequent policy years until the employee or former employee dies. We are unable to provide any comment on the calculation of the benefit under the changes announced in the February 1994 budget until such time as the legislation relating to the change is introduced.

We trust our comments will be of assistance to you.

Yours truly,

P.D. Fuoco
for Director
Business and General Division
Rulings Directorate
Legislative and Intergovernmental
Affairs Branch