9 January 1985 Income Tax Severed Letter

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.

A-0673

D.S. Delory

January 9, 1985

Dear Sirs:

This is in reply to your letter of October 31, 1984.

You are concerned with the income tax implications inherent in the situation where the benefits to a surviving spouse of an employee insured under a group term life insurance plan are payable solely in the form of an annuity for life, or until spouse remarries. Upon remarriage, the annuity payments case and the spouse is entitled to a dowry benefit equal to three years' payments. Our comments with respect to this situation are as follows:

1. Each insured employee is considered to have a life insurance policy with the plan's insurer. For the purposes of subsection 12.2(3) of the Income Tax Act (the "Act"), the date that the employee's life insurance policy was last acquired is the date the employee became insured by the plan's present insurer.

2. For the purposes of paragraph 12.2(3)(e) of the Act, the surviving spouse/beneficiary is considered to be the policyholder and is considered to have received the proceeds of the life insurance policy in the form of an annuity contract.

3. With respect to the annuity contract, its "cost" for the purposes of subparagraph 148(9)(a)(i) of the Act will be an amount equal to the present value, at the time if the employee's death, of the future payments to which the annuitant is entitled.

4. If the accrual rules contained in subsection 12.2(3) of the Act are applicable, the income accruing in respect if the surviving spouse's annuity contract will be considered to be that of the annuitant, not the employer.

5. Upon remarriage, the annuitant will be considered to have disposed of her/his interest in the annuity contract for proceeds equal to the amount of the dowry benefit. Pursuant to subsection 148(1) of the Act, the extent to which these proceeds exceed the adjusted cost basis of the annuity contract must be included in the annuitant's income.

The above comments are based on the assumption that the employee's life insurance policy represents an exempt policy.

We hope that the above information is satisfactory for your purposes.

Yours truly,

for Director Non-Corporate Rulings Division

12.2(3) 148(1) 148(9)