Principal Issues: At the 2015 CLHIA Tax Officers’ Meeting, a CRA official indicated that there is a review underway relating to new types of leveraged insured annuity arrangements. Can the CRA provide more details relating to the structures of these arrangements and its particular concerns?
Position: Comments provided below
CALU Roundtable – May 2016
Question 1 – LIA Policies
Background
In 2013, new rules relating to LIA policies and 10/8 policies (as defined in subsection 248(1) of the Income Tax Act (the “Act”)) were enacted to deal with certain planning arrangements where a life insurance policy and a life annuity (in the case of LIAs) are used as security for a loan arrangement. These rules eliminate most of the tax benefits that might otherwise arise from these arrangements. At that time, it was indicated that Finance will monitor developments in this area and, if structures or transactions emerge that undermine the effectiveness of the measure, evaluate whether further action is warranted, with possible retrospective application. At the 2015 CLHIA Tax Officers’ Meeting, a Canada Revenue Agency (CRA) official indicated that there is a review underway relating to new types of leveraged insured annuity arrangements.
Question
Can the CRA provide more details relating to the structures of these arrangements and its particular concerns?
CRA Response
LIAs are leveraged insured annuity arrangements involving a combination of a life insurance policy, an annuity and a loan that are designed to provide multiple and unintended tax benefits including a deduction for premiums, a deduction for interest expense on the loan and an increase in the capital dividend account on the death of the life/lives that is/are insured under the life insurance policy.
Since 1996, the CRA has expressed concerns with LIAs. While new rules were enacted in 2013 to eliminate the unintended tax benefits relating to LIAs, the CRA continues to be concerned with arrangements providing similar unintended tax benefits being promoted while technically escaping the LIA policy definition under subsection 248(1) of the Act.
Specifically, the 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.
The CRA has consistently expressed the view, including more recently at the 2014 APFF Conference, that, if the terms of a life insurance policy and an annuity contract were 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 of the Act could apply.
The CRA’s concerns with newly identified arrangements will be brought to the attention of Finance Canada so that they can evaluate whether further legislative action is warranted.
Prepared by: Alex Johnstone/Chantal Pelletier
2016-063260
May 3, 2016