28 July 1997 External T.I. 9713175 - RCA DEATH BENEFITS

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:

Are retirement arrangements funded through life insurance with neither surrender values nor non-forfeiture options (payable only on death) RCAs?

Position:

	As a general rule they are not precluded from being 	RCAs.

Reasons:

The comments the writer referred to were in respect to a position taken to ensure funded non-taxable death benefits did not become taxable as RCA benefits. The position should not be arbitrarily extended to other situations.

XXXXXXXXXX 971317

Attention: XXXXXXXXXX

July 28, 1997

Dear Sirs:

Re: Supplementary Executive Retirement Saving Plan

This is in reply to your letter of May 16, 1997, in which you requested clarification of statements made in certain Department correspondence.

In various letters issued by the Department pertaining to Retirement Compensation Arrangements ("RCAs"), wording similar to that used in our file 5-6287 has been used. This provides, in part, as follows:

"Where an employer acquires an interest in a life insurance policy on the life of an employee (other than a policy that provides for a benefit only on the death of the employee) and at or near the same time, enters into a plan or arrangement to provide retirement benefits to the employee, it is our view that it would be reasonable to consider that the policy was acquired to fund, in whole or in part, the retirement benefits, notwithstanding that any cash withdrawals or death benefits on the policy and the retirement benefits flow through the employer's working capital. Accordingly, it is our view that the provisions of subsection 207.6(2) of the Act would deem such a policy to be the subject property of a retirement compensation arrangement."

In this context you asked what is meant by the parenthetical phrase "other than a policy that provides for a benefit only on the death of the employee" and if this means that a life insurance policy without a cash surrender value and no non-forfeiture options would not be viewed as an RCA in the situation described.

The provisions of the definition of a "death benefit" in subsection 248(1) the Income Tax Act (the "Act") provide that a person may pay a tax free amount of up to $10,000 to one or more taxpayers as a result of the death of an employee. However, the provisions of the Act pertaining to RCAs also provides that the amount of any benefits paid out of an RCA must be taxed in full. Accordingly, it was considered that, if an employer funded the provision of an otherwise tax free death benefit through the acquisition of a life insurance contract such that the arrangement became an RCA, the full amount could become taxable when paid as a benefit out of an RCA. To alleviate this apparently unintended consequence, the Department took the position that if a life insurance policy is acquired by an employer to fund a tax free death benefit and the policy only provides for the payment of a benefit on the death of an employee, the Department will not consider it as being used to fund an RCA.

To date the application of this relief from the RCA provisions is specific to the treatment of arrangements in which a life insurance policy is used to fund tax free death benefits. It has not been extended to the acquisition of insurance to fund other employment benefits, and it does not mean that a life insurance policy without a cash surrender value and no non-forfeiture options would, in general, not be viewed as an RCA. Furthermore it should be noted that the paragraph is a statement of the Department's opinion and may not be relevant to any specific situation. It does not form an advance income tax ruling and it is not binding on the Department.

We trust these comments will be of assistance to you.

Yours truly,

for Director
Financial Industries Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch