7 October 1991 Income Tax Severed Letter - Life Insurance Policies

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: Life Insurance Policies

This is in reply to your letter dated September 9, 1991.

Your initial question is whether a policy loan to a corporation against the cash surrender value of a life insurance policy must be included in the computation of the corporation's capital under subsection 181.2(3) of the Income Tax Act (the "Act").

Policy loans have been held by the courts not to be loans, being more in the nature of advance payments of policy proceeds. (See also the comments in paragraph 4 of Interpretation Bulletin IT-355R.) As such, it is our opinion that policy loans are "advances" as contemplated in paragraph 181.2(3)(c) of the Act and are therefore to be included in computing the capital of the recipient corporation.

We understand your second question to be whether the cash surrender value of a life insurance policy constitutes long-term debt of a financial institution for purposes of determining a corporate policyholder's investment allowance under subsection 181.2(4) of the Act.

Subsection 181(1) of the Act defines "long-term debt" of a corporation other than a bank to be its "subordinated indebtedness evidenced by obligations issued for a term of not less than 5 years". The cash surrender value of a life insurance policy is generally considered to mean the amount which the insurer will pay upon cancellation of the policy prior to maturity, death, etc. As such, it is our opinion that the cash surrender value would not normally constitute indebtedness of the insurer.

With respect to the reference to "subordinated indebtedness" in the "long-term debt" definition in subsection 181(1) of the Act, we note in the case of an insurer that this will be a defined term under proposed federal legislation (Bill C-28, first reading in the House of Commons on June 19, 1991) which will essentially replace the Canadian and British Insurance Companies Act. That definition, contained in proposed section 2, reads as follows:

" "subordinated indebtedness" means an instrument evidencing an indebtedness of a company that by its terms provides that the indebtedness will, in the event of the insolvency or winding-up of the company, be subordinate in right of payment to all policy liabilities of the company and all other liabilities of the company except those other liabilities that, by their terms, rank equally with or are subordinate to such indebtedness;".

We would think that liabilities in respect of the cash surrender value of a policy would constitute policy liabilities and as such, would not be subordinated indebtedness of an insurer under the above proposed legislation. Should these proposals become law, it is our opinion the definition would be relevant for purposes of the Act.

Our comments are of a general nature and may not necessarily apply in the circumstances of a specific situation; nevertheless we hope this will be of assistance.