9 February 1995 Internal T.I. 9432316 - COST SHARED PAID UP PREMIUMS

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:

calculation of benefit from a prepaid insurance benefit under Part XXVII of the draft Regulations where the cost of paid up policy for retiree is shared by employer and active employees

Position TAKEN:

reg 2704 has no application unless the portion of premium paid by employee group relates to an additional amount of insurance offered on a particular policy (i.e. optional increases). Thus the benefit is calculated in the normal manner less any amounts paid by that employee in the current year or a prior year

Reasons FOR POSITION TAKEN:

In a cost shared arrangement, the "full cost" cannot be seen as paid by the employee group. thus, rather than prorate the benefit, the benefit as otherwise determined is reduced only by the premiums paid by the retiree for that particular policy

		February 9, 1995

	Source Deductions Division	Rulings Directorate
	André Bissonnette	A. Humenuk
	Director	957-8953
	Attention: Barb Larocque

		943231

Group Term Life Insurance Premiums

We are replying to your memorandum of December 6, 1994 concerning the calculation of the prepaid insurance benefit from the purchase of a paid-up group term life insurance policy as determined under the paragraph 2701(1)(b) of the draft Regulations released by the Department of Finance on June 16, 1994.

In the situation you describe, an employer provides group term life insurance to its employees on a cost-shared basis. Upon retirement, an individual's coverage is continued through the purchase of a paid-up policy which is funded by additional amounts which were previously contributed to a fund set up for this purpose by both employer and employee. You have asked whether the purchase of such a policy will give rise to a taxable benefit to the retired employee and if so, whether the benefit can be pro-rated to reflect the contribution made by the group of employees.

In your memorandum, you state that coverage for retired employees is not provided through term insurance. While it is not clear what you meant by that statement, paragraph 5 of Interpretation Bulletin IT-227R "Group Term Life Insurance Premiums" explains that a paid-up group life insurance certificate may qualify as part of a group term life insurance policy. This would typically be the case where the certificate had no cash surrender value. The proposed amendment to subsection 248(1) of the Act clarifies this aspect of the definition of "group term life insurance policy". For the purposes of our response, we will assume that the lump sum premiums paid to provide life insurance coverage for retired employees are paid in respect of a group term life insurance policy as defined in subsection 248(1) of the Act.

The amount to be included in the employee's or former employee's income from a group term life insurance policy is determined under subsection 6(4) of the Act. Under the proposed amendments to that subsection, the amount of benefit to be included in income from the payment of a paid-up premium under a group term life insurance policy will be determined under section 2703 as modified by the deeming provision in section 2704 of the draft Regulations.

The deeming provision found in section 2704 of the draft Regulations only applies where the full cost of insurance is borne by the individuals insured under the policy or, where the policy can be divided into two or more component parts (such as where additional insurance coverage is offered as an option), the full cost of such additional insurance is borne by the individuals covered by the additional insurance. Accordingly, where the cost of the premium on a paid-up policy is shared by the employer and employees, it is our view that section 2704 of the draft Regulations would have no application and the amount of the prepaid insurance benefit would be determined under section 2703 of the Regulations. In determining the portion of any premium which can be excluded from the calculation of the benefit, the "taxpayer portion" as defined in subsection 2703(2) of the Regulations would include all amounts paid by the retired employee in the year or any prior year.

If the paid up premiums are not paid in respect of a group term life insurance policy as defined in subsection 248(1) of the Act, then the fair market value of the benefit derived from the purchase of the policy is required to be included in the retired employee's income under either subsection 6(3) or subparagraph 56(1)(a)(iii) without regard to any exception described in paragraph 6(1)(a) of the Act. A reasonable estimate of the value of such a benefit would be the amount of the premium paid for the policy less any amount contributed by the individual.

B.W. Dath
Director
Business and General Division
Rulings Directorate
Policy and Legislation Branch