8 May 2012 Roundtable, 2012-0435771C6 - CALU CRA Roundtable – May 2012 - Question 10

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.

Principal Issues: 1) What factors does the CRA consider in determining whether the RCA deeming rule in subsection 207.6(2) applies to a particular life insurance policy? 2) Can the deeming rule apply where the life insurance policy is acquired before the retirement benefits become provided? 3) Can the deeming rule apply to segregated fund policies?

Position: 1) Listed some of the relevant factors. 2) Yes, depending on the circumstances. 3) Yes.

Reasons: 1) Reflects draft position prepared in response to Question 8 at the 1992 CALU roundtable. 2) The wording "reasonably be considered to be acquired to fund, in whole or in part, those benefits" has a broad meaning.3) The definition "life insurance policy" in subsections 138(12) and 248(1) includes a segregated fund policy.

CALU CRA Roundtable – May 2012

Question 10 - Deemed RCA Rules

Background

Subsection 207.6(2) of the Act deems the RCA rules to apply to situations where

1) the employer has a legal obligation to provide benefits that are to be received or enjoyed by any person on, after, or in contemplation of any substantial change in services rendered by the retirement or loss of an office or employment of a taxpayer;
2) the employer acquires an interest in a life insurance policy; and
3) such insurance policy “may reasonably be considered to be acquired to fund, in whole or in part,” the benefits.
If the RCA rules apply, the person or partnership (i.e. the employer) that acquired the insurance policy will be deemed to be the custodian of an RCA and its interest in the policy will be considered the subject property of an RCA. The employer will have to pay Part XI.3 refundable tax in an amount equal to the amount deposited to the insurance contract. In such an event, both the insurance deposit and the payment of refundable tax are deductible to the employer.

There is no case law which provides guidance on when an interest of an employer in an insurance policy “may reasonably be considered to be acquired to fund, in whole or in part,” in the context of subsection 207.6(2).

In CRA Document #9322475 (September 16, 1993), the CRA made the following comments regarding the funding test:

Where retirement benefits are to be funded by an insurance policy and an employer acquires an interest in the policy, the policy and all relevant documentation would have to be reviewed to determine if that interest may reasonably be considered to have been acquired to fund, in whole or in part, those benefits. In our view, the fact that the employer's share of the premiums under the policy would represent only the pure cost of term insurance would not of itself necessarily decide the issue. For example, if the employee's share of the premiums under the policy are less than would be required to fund similar retirement benefits under a policy where the employee paid all the premiums, it would seem reasonable to conclude that the employer's share of the premiums would be funding at least part of the retirement benefits. If so, the employer's interest in the policy would in our view be deemed to be the subject property of a retirement compensation arrangement ("RCA") by reason of subsection 207.6(2) of the Income Tax Act.

Question 10.1

(1) Can the CRA provide an update as to any additional circumstances that might lead it to conclude that a life insurance policy can “reasonably be considered to be acquired to fund in whole or in part” so that subsection 207.6(2) applies?

(2) As the test looks to the purpose for the acquisition of the policy, can the CRA confirm that this test is only applied at the time of the acquisition of the insurance policy? For example, assume a life insurance policy is acquired at a particular time by the employer, and subsequent to that time the employer becomes legally obligated to pay retirement benefits to an employee. Can the CRA confirm that the policy could not be deemed to be an RCA under subsection 207.6(2)?

CRA Response

Some of the factors that we would consider in determining whether subsection 207.6(2) of the Act would apply to deem a life insurance policy held in connection with an employee retirement plan to be an RCA include:

• the identity of the employees whose lives are insured as compared to those to be provided benefits under the plan;
• the timing of the acquisition of the insurance and the setting up of the plan;
• the extent of the monetary coverage under the insurance as contrasted with the value of the benefits under the plan; and
• reasons (other than the existence of the plan) for the employer's purchase of insurance. For example, we have previously opined that the RCA deeming rule may not necessarily apply to: (i) "key man" insurance acquired as coverage for losses or damages the employer might suffer on the death of an employee; and (ii) life insurance policies acquired solely to pay benefits in the event of the death of an employee.

We disagree with the proposition put forward in the second question. In our view, the RCA deeming rule can apply even where the life insurance policy is acquired before the retirement benefits become provided. For example, we would normally seek to apply the rule where the policy is acquired shortly before, or in contemplation of, the provision of retirement benefits. Ultimately, the determination of whether this rule applies in a particular situation is a question of fact that requires consideration of all of the circumstances.

Question 10.2

The definition of a “life insurance policy” includes an annuity contract and a segregated fund policy. Many segregated fund policies are structured so that they are also considered annuity contracts under the Act by providing for annuity payments after a specific maturity date or triggering event or by providing for the purchase of an annuity contract after such time. The CRA has confirmed in the past that subsection 207.6(2) can apply to annuity contracts.

Has the CRA considered whether subsection 207.6(2) could apply to segregated fund policies and if yes, in what circumstances?

CRA Response

The CRA has not previously considered the RCA deeming rule in the context of segregated fund policies. However, since the definition "life insurance policy" in subsections 138(12) and 248(1) of the Act includes a segregated fund policy, we agree that such policies fall within the scope of the rule.

Dave Wurtele
2012-043577