7 September 1994 Internal T.I. 9419087 - EMPLOYEE CONTRI TO FUND PAID UP POLICY FOR RETIRED E

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:

whether a retired employee is taxed on paid up life insurance purchased solely with contributions by employees

Position TAKEN:

no

Reasons FOR POSITION TAKEN:

ss 2704(1) of the draft regulations. -a paid up policy is still a group term life insurance policy if it meets the def'n in 248(1). Thus the reference in 2704(1) of the regulation to "the full cost of insurance ...under a policy .. borne by the individuals whose lives are insured under the policy" would include the prepaid premium on a single individual's life under the group term life insurance policy. While there is a certain perceptual difficulty in seeing paid up life insurance on a single individual as group insurance, paragraph 5 of it-227R clarifies that the paid up premium is for a group life insurance certificate which is part of a larger policy

		September 7, 1994

	Saskatoon District Office	Rulings Directorate
	Source Deduction Division	A. Humenuk
		957-8953
	Attention: Lawrence Stanbury
		941908

Group Term Life Insurance Premiums

Your memorandum of July 6, 1994 addressed to Source Deductions Division was referred to us for reply. In the comments that follow, unless otherwise stated, all statute references are to the Income Tax Act S.C. 1970-71-72, c.63 as amended, consolidated to June 10, 1993 (the "Act").

Subsection 6(4) of the Act sets out the extent to which an employee or former employee is taxed on the benefit derived from an employer's contribution to a group term life insurance policy. The June 16, 1994 News Release issued by the Department of Finance details the draft amendments to the Act and Regulations which are to take effect as of July 1, 1994 concerning the taxation of such a benefit.

Generally, the benefit to be included in an employee's or former employee's income from an employer's contribution to a group term life insurance policy as determined under the draft legislation is the cost of the coverage less any amount paid by the employee for such coverage. In the example given by XXXXXXXXXX in their letter of June 6, 1994, the employer will pay the monthly premium on the first $10,000 of coverage at a rate of $.13 per $1000 of coverage and the employee will pay the balance of the premium required under the policy. In addition, the employee will contribute an additional $.02 per $1,000 of coverage in excess of $10,000 a month into a fund which will be used to provide paid up life insurance for retired employees.

We agree with your assessment that the taxable benefit to the active employees will be the employer's share of the premium. We note that the calculation of the benefit as found in subsection 2702(1) of the draft Regulations requires a determination of the actual cost of term insurance in effect on the life of an employee for the year under the policy and that the amount of the term insurance benefit is then calculated by subtracting from that amount the amount paid by the employee for such coverage. Since the additional $.02 per $1,000 coverage in excess of $10,000 paid by active employees is neither paid on account of term insurance on the life of the employee for the current taxation year nor is it paid as part of the premium, such payment will not reduce the employees' term insurance benefit determined under section 2702 of the Regulations.

With respect to the paid-up life insurance to be purchased for retired employees from the fund created by the additional employee contributions, subsection 2704(1) of the draft Regulations deems the benefit from employee-paid term and prepaid insurance to be nil. Accordingly, it is our view that no taxable benefit would be applicable in respect of a paid up premium on a group term life insurance policy for retired employees where the full cost of such insurance is borne by the employees' contributions.

P.D. Fuoco
Section Chief
Personal and General Section
Business and General Division
Rulings Directorate
Policy and Legislation Branch
c.c. Barb Larocque
Source Deductions Division