20 August 1999 External T.I. 9917895 - PAID UP LIFE INSURANCE BENEFIT

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) What is the amount of employee benefit for a paid-up premium for a retired employee which is paid over three year, beginning on the employee's retirement. (2) What happens if the employee dies and the unpaid premium becomes fully due?

Position: (1) Presuming that the employer bears the full cost and the insurance policy is a group-term life insurance policy, the amount of the benefit is equal to the sum of each lump-sum premium paid in the year on the life of the taxpayer. (2) Where a taxpayer dies in a calendar year, the taxpayer's prepaid insurance benefit for the year is that portion on any lump-sum premiums paid after Feb. 1994 that have not been included in the taxpayer's prepaid insurance benefit for previous years.

Reasons: Based on subsection 6(4) of the Act and section 2703 of the Regulations.

xxxxxxxxxx
J. Gibbons
5-991789

Attention: xxxxxxxxxx

August 20, 1999

Dear XXXXXXXXXX:

This is in response to your letter of June 22, 1999, in which you requested our views on the tax treatment of paid-up life insurance for retired employees.

Written confirmation of the tax implications inherent in particular transactions is given by this Directorate only where the transactions are proposed and are the subject matter of an advance ruling request submitted in the manner set out in Information Circular 70-6R3. The following comments are, therefore, of a general nature only.

In the particular situation described in your letter, the employer pays the premium over three years, beginning on the date an employee retires. You are of the view that the retiree in this situation receives a taxable employee benefit over the three years, based on the amount of premium paid each year. If the retired employee should die before this three year period has expired, the employer is billed for the full amount of the unpaid premium. In this situation, it is your view that the taxable benefit is equal to the amount of that final bill.

Our views

It is presumed, for purpose of our response, that the insurance policy is a group term life insurance policy. Thus, subsection 6(4) of the Income Tax Act applies, instead of the more general paragraph 6(1)(a), which taxes all types of employee benefits. We have also presumed that the employer bears the full cost of the premiums, and thus section 2704 of the Regulations is inapplicable. On this basis, we agree generally with your analysis.

Subsection 6(4) provides that the value of the employee benefit for employer-paid group term life insurance for a calendar year is the amount prescribed by regulation. In general terms, section 2703 of the regulations provides that, for a calendar year at the end of which the taxpayer is alive, this amount of the benefit is equal to the sum of each lump-sum premium paid in the year in respect of insurance on the life of the taxpayer. Where a taxpayer dies in a calendar year, the taxpayer's prepaid insurance benefit for the year is that portion of any lump-sum premiums paid after February 1994 that have not been included in the taxpayer's prepaid insurance benefit for previous years.

We trust that these comments will be of assistance.

Yours truly,

John Oulton
for Director
Business and Publications Division
Income Tax Rulings and
Interpretations Directorate