At the 2015 CLHIA Tax Officers’ Meeting, CRA indicated that there is a review underway relating to new types of leveraged insured annuity arrangements. What are the structures of these arrangements and CRA’s concerns? After referring to arrangements which “technically escaping the LIA policy definition,” CRA stated:
[T]he CRA identified LIAs where products that form part of the arrangements are interdependent and would not have been otherwise issued without the others. The CRA is concerned with these arrangements because they involve manipulating the terms of the products (including pricing) that form part of the arrangements and the issuance of products that would not have been otherwise issued on a stand-alone basis (including life insurance policies insuring non-insurable lives) to obtain unintended tax benefits.
…[I]f the terms of a life insurance policy and an annuity contract [are] such that neither contract would be issued without the other, it might be possible to conclude that they represent the issuance of one contract. The CRA has also expressed the view that the general anti-avoidance rule found in section 245… could apply.
The CRA’s concerns with newly identified arrangements will be brought to the attention of Finance Canada… .
When asked to comment on whether grandfathered status for an LIA would be lost for various types of post-March 20, 2013 transactions, CRA stated:
When the terms of a loan agreement are changed after March 20, 2013 without increasing the amount of borrowings as of March 20, 2013… [and w]hen the changes do not create a new loan agreement… the person or the partnership has not become obligated after that date to repay an amount. A change in the interest rate, an extension of the duration of loan or a change to the terms of repayment may not, in and of itself, result in a new loan. Such a determination can only be made after a review of the terms of the particular loan agreement.
Also… the borrowing of an additional amount from the current lender would cause a person or a partnership to be obligated, after March 20, 2013, to repay an amount… even if the combination of borrowings does not exceed the amount of the borrowings outstanding as of March 20, 2013.
Finally, where a life insurance policy was assigned as security to the lender prior to March 21, 2013 and it is then replaced with a new life insurance policy after that date … this fact, in itself, will not jeopardize the grandfathered status… .