23 May 1995 Ministerial Letter 9518068 - PAID UP PREMIUMS FOR RETIREES AFTER FEB BEFORE JULY

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.

May 23, 1995

XXXXXXXXXX

Dear XXXXXXXXXX:

I am replying to your letter of April 5, 1995, concerning the taxation of lump sum premiums paid by an employer in respect of a group term life insurance policy.

Prior to recent changes to the Income Tax Act, an employee or former employee was required to include in income the value of premiums paid in respect of that individual's coverage under a group term life insurance policy in excess of $25,000. On June 16, 1994, the Department of Finance released draft legislation to implement the February 1994 budget proposal to eliminate the $25,000 exemption which was to be effective July 1, 1994. In your letter, you explain that you had purchased paid-up group term life insurance for some of your retired employees prior to the release of the draft legislation on the basis of advice received from a benefits consultant.

You suggest that Revenue Canada is being too rigid in its interpretation of the new rules and that no amount should be included in the six former employees' income since the coverage for those individuals was under $25,000 and the premium was paid before July 1, 1994.

The new rules governing the taxation of prepaid or single premium insurance benefits for an employee or former employee are quite specific. The $25,000 exemption is not available in respect of a lump sum premium paid after February 1994 where the insured individual is alive on July 1, 1994. For lump sum premiums paid after February 1994 and before 1997, the amount to be included in income is one third of the premium for each of three years starting with the year in which the premium was paid. For lump sum premiums paid after 1996, the full amount of the premium will be included in the insured individual's income in the year paid. The employer's deduction for the amount so paid corresponds to the amount which has been included in the employee's income.

The draft legislation does not represent a change in policy but rather clarifies how the budget proposal was to be implemented, particularly in respect of paid-up premiums for a group term life insurance policy. The budget proposal, as expressed in the Notice of Ways and Means Motion tabled in the House of Commons by the Honourable Paul Martin, Minister of Finance, on February 22, 1994, states that the amount to be included in an employee's income for group term life insurance provided after June 1994 will be determined without reference to the former $25,000 exemption.

In the case of a paid-up premium for an individual insured under a group term life insurance policy, the premium provides coverage for the remainder of an individual's life. Thus, a premium paid in May 1994 will provide coverage both before and after July 1, 1994, as long as the insured individual is alive after June 1994. Although the budget documents did not specifically address the taxation of paid-up premiums made before July 1994, the intent of the draft legislation was to eliminate the exemption for any coverage provided after June 1994.

I trust that my comments have clarified the manner in which the new rules are to be implemented.

		Yours sincerely,

		Pierre Gravelle, Q.C.