7 April 1999 External T.I. 9900525 - SPLIT DOLLAR /UNIVERSAL LIFE INSURANCE

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:

The determination of a taxable benefit pursuant to paragraph 6(1)(a) when dealing with a universal life insurance policy for purposes of split dollar arrangements.

Position:

We are unable to provide a general position with respect to the determination of a taxable benefit pursuant to paragraph 6(1)(a). It is to be determined on a case by case basis.

Reasons:

Universal life insurance policies are very flexible . It is our understanding that the level of premiums and benefits can vary from year to year.

XXXXXXXXXX 						990052
							Michèle Trotier
Attention:  XXXXXXXXXX 

April 7, 1999

Dear Sirs:

This is in reply to your letter of December 18, 1998 to Mr. Lennas Moore of our Halifax Tax Services Office wherein you requested a technical interpretation with respect to a universal life insurance policy which may be subject to a split dollar arrangement and the application of paragraph 6(1)(a) and subsection 6(3) of the Income Tax Act.

The income tax implications with respect to such policies can only be determined after a review of all the terms and conditions of a particular proposed arrangement to be entered into with all the parties involved being identified. Should you wish to proceed with a request for an advance income tax ruling with respect to a particular proposed arrangement it should be submitted in the manner set out in Information Circular 70-6R3 dated December 30, 1996.

We would like to reiterate what we indicated at The Conference for Advanced Life Underwriting in May 1998 in light of the reference in your letter to Revenue Canada's position in earlier years with respect to split dollar arrangements and the application of paragraph 6(1)(a). We note that our previous comments with respect to such arrangements were predicated on life insurance products such as whole-life insurance policies. It is our understanding that the type of split dollar arrangements which are now available have evolved from the so-called conventional split dollar insurance policies which we had been asked to comment on in the past. These arrangements have become very innovative. We are also of the view that the terms and conditions of universal life insurance policies are so flexible that they can only be commented on by reviewing a specific universal life insurance contract and all the other related agreements which may form part of the particular split dollar arrangement.

We do note for your consideration some potential concerns we have with the use of universal life insurance policies for purposes of split dollar arrangements.

The various elements within a universal life insurance policy are normally all intertwined such that what you identify as the "protection" element may not be able to exist without the "other" elements or the so-called "remaining interest" which you referred to in your letter. We have been advised that such products are so flexible that it is not generally possible to know what the future premiums or future benefits with respect to the policy will be. You have advised that there is no assurance, at any time before the maturity of the policy, that further premiums will not be required. In light of these factors, we have difficulty conceptualizing how a universal life insurance policy could reasonably be "split" into identifiable interests.

It also appears to us that term insurance is not necessarily reflective of a possible measurement tool against which the determination of a taxable benefit pursuant to paragraph 6(1)(a) of the Income Tax Act could be made when dealing with a universal life insurance policy. Unlike an insurance product such as the whole life insurance policies which provides level pre-determined insurance benefits and premiums, it is our understanding that the level of benefits and premiums with respect to universal life insurance policies can vary from year to year. Consequently, we are unable to provide you with a general position with respect to the determination of a taxable benefit as you requested in your letter when dealing with a universal life insurance policy. Such a determination can only be made on a case by case basis upon review of all the relevant documents.

The foregoing comments are intended as a general discussion only and do not relate to any particular situation. While we hope our comments are of assistance to you they neither address all of the potential income tax implications nor do they constitute an advance income tax ruling and therefore are not binding on the Department in respect of a specific situation.

Yours truly,

F. Lee Workman
Section Manager
Financial Institutions Section
Financial Industries Division
Income Tax Rulings
and Interpretations Directorate
Policy and Legislation Branch

c.c. Lennas Moore

Audit Review, Revenue Canada
Halifax Tax Services Office