16 July 1996 External T.I. 9612305 - Regulation 2702 - Meaning of "Paid"

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:

1.whether the calculation of the "average daily cost of insurance" has changed now that the wording is slightly different in draft Regulation 2702.

2.whether in circumstances where amounts are not paid directly to policyholder those amounts are still considered "paid" for purposes of the calculation.

Position:

1.Essentially, the calculation is the same. The added feature is the reduction of the C amount by that portion of the experience rated refund or dividend that is distributed to individuals insured under the policy

2.The term "paid" in this context includes amounts unconditionally credited to the policyholder or individual insured under the policy, i.e., constructively received by the "payee".

Reasons:

1.The intent of the legislation has not changed. The rare circumstance where individuals insured under the policy actually share in the dividend or refund is now covered, and explained in the Technical Notes.

2.For an amount to be considered paid under the policy it must first become payable under its terms, then when the obligation is discharged in one form or another the amount would be considered paid.

									961230
XXXXXXXXXX							J.A. Szeszycki
(613) 957-8953
Attention:  XXXXXXXXXX

July 16, 1996

Dear Sirs:

Re: Draft Subsection 2702(2) of the Income Tax Regulation

This is in reply to your letter of April 2, 1996, in which you requested clarification as to the meaning being given to a particular phrase found in the draft provisions of subsection 2702(2) of the Income Tax Regulations (the "Regulations".)

Draft Part XXVII of the Regulations sets out the manner in which the benefit with respect to employer-provided group term life insurance is calculated after June of 1994. Previously, the benefit was computed under the authority of subsection 6(4) of the Income Tax Act (the "Act"). Within former paragraph 6(4)(a), which provided the formula for computing the average daily cost of insurance, reference was made to "the amount of any dividend or experience rating refund payable" with respect to life insurance coverage for the year.

In contrast, draft subsection 2702(2) of the Regulations sets out the present formula for the computation of the average daily cost of insurance. The portion of the formula which corresponds to the segment of former subsection 6(4) of the Act cited above, as you noted, uses different wording in describing the amount. "C" of the formula in draft paragraph 2702(2)(a) of the Regulations refers to "the total amounts of policy dividends and experience rating refunds paid in the year under the policy and not distributed to individuals whose lives are insured under the policy." This revised wording strongly implies that, to the extent that the policy dividend or experience rating refund is distributed to an individual whose life is insured under the policy, it will not be part of the calculation. This interpretation is supported by the comment found in the accompanying Technical Note, issued by the Department of Finance, which states that "in the unusual case where a dividend or experience rating refund is distributed to the individuals insured under the policy, the distributed amount is to be excluded in computing average daily cost."

You have asked whether, in accordance with the new phrasing, the following situations represent circumstances in which amounts are considered "paid" to either the policyholder (employer or representative) or the individual insured under the policy (employee). The underlying situation involves a multi-employer plan in which the policyholder is a representative of all the employers under the plan.

A surplus is determined to exist in an experience rated policy in respect of a specific year for life insurance coverage. You have referred to financial funding arrangements which provide that the surplus automatically (or at the discretion of the policyholder) be:

1) set aside in a reserve waiver of premium fund (in respect of disabled members whose premiums have been waived),

2) deposited into a deposit fund account which may be accessed by the employee and/or the employer representatives at their discretion, and,

3) used to reduce existing deficits under the life insurance policy in respect of both the employer and employee contributions.

As a starting point in determining whether an amount is considered paid under the policy, it should first be determined whether the amount was payable under the terms of the policy. A sum of money is said to be payable when a person is under an obligation to pay it, and the payment is the discharge of that obligation. It follows, therefore, that for an amount to be considered paid to a policyholder and/or the individual insured under the policy, there must exist under the terms of the policy an obligation to pay the amount to that policyholder or individual.

It is our view that when an experience rated surplus, as that term is defined under the policy, is created, any provision which obliges the insurer to remit that surplus, or any portion of it, back to the policyholder or insured individual would establish an amount payable. The actual discharge of that obligation would be considered, for the purposes of "C" in the formula in paragraph 2702(2)(a) of the Regulations, as an amount paid under the policy. The discharge of a refund obligation under the policy can take the form of an unconditional credit to the recipient as well as a direct payment. The doctrine of constructive receipt has application under these circumstances.

In contrast, a provision of the policy under which the surplus is to remain within the jurisdiction of the insurer, with no obligation on its part to distribute any portion of the amount to the policyholder or insured individual, will not result in an amount having been paid under the policy.

With respect to the three specific circumstances outlined above, we note that if an amount becomes payable (as discussed above) under the policy to the policyholder and the policyholder exercises its discretion in permitting the amounts to be used to finance other features of the policy rather than directly receiving the amounts, we consider the amount paid under the policy as soon as the obligation to remit the amount payable has been discharged. If the policyholder does not have such discretion, that is, under the terms of the policy, experience rated surplus amounts are not payable to the policyholder but are required to be used to offset either existing deficits or other policy features such as described in 1 above, then those amounts would not be considered paid to the policyholder or insured individual. If the amounts of surplus are deposited into a deposit fund account to which the employer representative and/or employees have access, we will consider such amounts to have been paid. In our view, the amounts will be considered paid to the policyholder and to the extent that the account is accessed by employees, it will be considered distributed to individuals insured under the policy.

We trust our comments will be of assistance to you.

Yours truly,

John F. Oulton
for Director
Business and Publications Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch