2 February 1995 External T.I. 9427775 - RRSP INSURANCE QUALIFIED INVESTMENT

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: Can a specific insurance contract be held in an RRSP

Position TAKEN: Certain types of policies can. It is a question of fact

Reasons FOR POSITION: General application of law

XXXXXXXXXX 5-942777

February 2, 1995

Dear XXXXXXXXXX:

This is in reply to your letter of October 27, 1994 concerning the use of an existing insurance policy as or as a property of a Registered Retired Savings Plan (an "RRSP").

Written confirmation of the tax implications of proposed transactions can only be provided by this Directorate where the transactions are the subject matter of an advance ruling request submitted in the manner set out in the attached Information Circular 70-6R2. Accordingly, we are unable to reply specifically to your concerns with respect to your particular policy at this time. Nevertheless, we can provide the following general information which you may find to be of assistance.

There are two ways in which a life insurance policy can be used in conjunction with an RRSP.

A life insurance policy can be registered as an RRSP in itself.

This is done by the insurance company and involves a number of issues beyond the scope of this letter. In simplest terms, a life insurance policy can be registered as an RRSP if it is a contract between an authorized insurer and an individual under which the insurer agrees to provide a retirement income to the individual at maturity in return for consideration in the form of premiums. The "maturity" of an RRSP must be a date fixed under the terms of the plan for the start of the retirement income and can be any date that is on or before the end of the year in which the individual attains 71 years of age.

Retirement income must be paid out of the plan as an annuity in a form permitted under the Income Tax Act (the "Act"). It would not be sufficient that a contract merely provides that the policy can be terminated by the maturity date and the funds used to acquire a registered retirement income fund (an "RRIF").

A life insurance policy may be acquired by a trust governed by an RRSP.

The Act provides that life insurance policies may be acquired by trusts governed by RRSPs but only if those policies conform to certain conditions as discussed in the Department's Interpretation Bulletin IT-408R, a copy of which is also enclosed. These are the rules referred to by your insurance agent.

Specific to your concerns, one of these rules provides that the cash surrender value of a policy (excluding dividends) must be equal to or greater than the maximum amount payable under the policy (excluding dividends) at some time before the 71st birthday of the insured. Please note that the calculation of these values does not exclude accumulated interest or any other accumulation of funds other than accumulated dividends. Accordingly if, for example, you were to consider a policy with a total death benefit of $550,000 including accumulated funds of $485,000 but no policy dividends, the cash surrender value of the policy would have to be at least $550,000 at some time before you turned 71 in order that your RRSP could acquire it.

Although it is stated in the material you supplied that a life insurance policy must mature at the same time as the RRSP, in fact, there is no such requirement under the Income Tax Act. However, as discussed above, an RRSP must provide for the use of its funds to provide a retirement income at the time of maturity of the RRSP. Accordingly, problems could arise if your RRSP entered into an insurance contract which continued beyond the maturity date of the RRSP.

With respect to the acquisition of an existing insurance contract by a trust governed by an RRSP, the trust must also be the only person, other than the insurer, who is entitled to any rights or benefits under the policy. Therefore the trust must be named as the owner and sole beneficiary of the policy and you would not have any personal right to change any designations in the policy. On the other hand, as the annuitant of the RRSP, you would normally have the right to name a beneficiary of the RRSP or name your spouse as annuitant of the RRSP upon your death subject to the terms of the RRSP and any applicable succession or family property laws.

An RRSP trust can acquire property by purchase or through contributions made in kind by the RRSP annuitant. Accordingly an existing life insurance contract owned by an annuitant of a plan can be transferred to a plan either as a contribution or through a non-arms length sale. In either event the value of the transfer must be recorded at the policy's fair market value at the time of the transfer. For this purpose, the Department is generally prepared to accept that the value of a life insurance policy is the greater of:

the aggregate of the premiums paid for the policy;

and

the aggregate of its cash surrender value and the
accumulated dividends standing to the annuitants

credit.

The above comments are based on our understanding of the law as it applies in general. However, they may or may not apply to the circumstances of a particular case. The comments do not form an advance income tax ruling and they are not binding on the Department.

Yours truly,

for Director
Financial Industries Division
Rulings Directorate
Policy & Legislation Branch