7 May 1991 Income Tax Severed Letter - Split Dollar 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.

Dear Sirs:

Re: Split Dollar Life Insurance

This is in reply to your letter of February 12, 1991 in which you requested our views as to whether a shortened premium paying period in connection with split dollar life insurance arrangements would alter the Department's established positions on the tax treatment of these arrangements.

In your letter you set out a sample arrangement involving an individual insured for a death benefit of $5,000,000. with a product described as a Term to 100 policy with a non guaranteed Capital Fund Value. The funding under this arrangement is in the form of five annual premiums [traditionally, premiums are paid annually over the term of the contract]. The corporate portion of the payment is limited to the increase in the Capital Fund Value in each of the five years with the balance of the required premium being paid by the employee. Neither portion of the payment is tax deductible to the payer. The corporation owns the Capital Fund Value and as such may be withdrawn at any time by the corporation. The benefit to the insured is limited to the death benefit payable to the beneficiary as designated by the insured.

The Department's concerns in reviewing such arrangements are in determining whether a benefit is conferred on the insured (employee or shareholder). Generally, we do not consider the individual whose life is insured under a split dollar insurance policy to be in receipt of a benefit if the annual premium, or the portion thereof, that is paid by the corporation does not exceed the increase in the cash surrender value of the policy in that year. This position only applies where the corporation is entitled to the cash surrender value of the policy on its termination or to a portion of the amount payable under the original policy on death equal to its cash surrender value immediately before death, as well as to dividends that arise in connection with the policy. Where the premium does exceed the increase in the cash surrender value in the year a benefit in the amount of the excess is considered to have been conferred on the individual, either under section 6 or 15 of the Income Tax Act, depending on whether the benefit is received in their capacity as employees or shareholders. As well, in order to retain its tax-free status the proceeds payable to the beneficiary upon the death of the insured is limited to the original death benefit amount.

The description of the sample arrangement set out in your letter and its appendix emphasizes that the above conditions continue to be met. It is our view, therefore, that where an arrangement involving a split dollar life insurance policy otherwise qualifies as set out above, the Department's position will not be altered due to the shortened premium paying period. In addition, where the insured is a shareholder, significant or otherwise, the position would remain the same.

We trust our comments will be of assistance to you.