CRA gives examples of where the holding by an RCA trust of life insurance policy providing more than a nominal death benefit gives rise to RCA advantage tax

CRA in two interpretations has expanded on its comment in 2013-0481421C6 that the holding by an RCA trust of life insurance policy providing more than a nominal death benefit could give rise to RCA advantage tax.

The first interpretation concerned an RCA trust holding a a universal life insurance policy on the life of the individual who was the sole specified beneficiary of the RCA. The amount of the death benefit under the policy was constant over the duration of the policy, while the cash value increased each year, and the protection component correspondingly decreased each year. CRA stated:

[T]he amount of the protection component of the death benefit under the policy far exceeds the individual’s own entitlement to retirement benefits under the RCA. The amount also far exceeds a reasonable level of survivor benefits and there is no actuarial basis to support the amount as being reasonable. Upon the death of the individual, regardless of the individual’s number of years of service, salary history or age, the funds derived from the proceeds of the protection component of the death benefit (as well as the cash value…) would become available to the individual’s spouse…or… estate.

[T]he yearly life insurance coverage… constitutes an advantage…that is subject to advantage tax.

In a similar vein, in the second interpretation respecting a trusteed defined benefit supplementary pension plan (an RCA) for several key owner-managers, CRA stated that there “would be an RCA advantage if the policy was acquired to, in effect, provide key-person coverage to indemnify the employer for potential loss of profits or additional costs that may be incurred in the event of the death of the insured.”

Neal Armstrong. Summaries of 2015 External. T.I. 2013-0499501E5 and 2015 External. T.I. 2014-0544211E5 under s. 207.5(1) - advantage - (a).