Principal Issues: Whether the return of premium portion of the payment received on the cancellation of an individual CII policy, which is held by an employee or a shareholder of a corporation, would be taxable for income tax purposes.
Position: Question of fact.
Reasons: Without specific and complete details regarding the particular policy and the jurisdiction to which it pertains, it would not be possible to advise of the taxability of the ROP or other payment from the plan.
January 18, 2010
XXXXXXXXXX
Dear XXXXXXXXXX :
The Honourable James M. Flaherty, Minister of Finance, forwarded to me a copy of your correspondence concerning the income tax implications that arise on the cancellation of a critical illness insurance (CII) policy. Please accept my apology for this delayed response.
You ask whether the return of premium (ROP) portion of the payment received on the cancellation of an individual CII policy, which is held by an employee or a shareholder of a corporation, would be taxable for income tax purposes. You have advised that the company would pay all of the premiums payable under the policy except for those relating to the ROP, which would be paid by the employee or shareholder.
Although many variations are possible, at a basic level, a CII policy provides for the payment of a lump-sum amount in the event the insured individual is diagnosed with a critical illness. Subject to certain exceptions, the Income Tax Act provides that the value of any benefit received by or conferred on a taxpayer by virtue of his or her employment with or shareholding in a corporation will be included in the taxpayer's income for tax purposes. The Act provides an exception for benefits derived from an employer's contributions to a "group sickness and accident insurance plan." The payment of any portion of an employee's non-group CII premium by an employer such as you describe would not fit within this exception. The payment would therefore give rise to a taxable employment benefit for income tax purposes.
Similarly, and subject to certain exceptions, the payment of CII premiums by a corporation by virtue of an individual's status as a shareholder would give rise to a shareholder benefit for income tax purposes. It would therefore be included in calculating the income of the shareholder for the year. In addition, any expenditure that the corporation incurs in providing the benefit to the shareholder would not be deductible to the corporation on the basis that the expenditure would not have been made for the purpose of gaining or producing income.
Notwithstanding that an employee or shareholder may pay all of the premiums payable with respect to the ROP portion of a CII policy, it remains a question of fact whether an ROP payment received by an employee or shareholder would be taxable. Without specific and complete details regarding the particular policy and the jurisdiction to which it pertains, it would not be possible to advise you on the taxability of any ROP or other payment from the plan.
I trust that the information I have provided is helpful.
Sincerely,
Jean-Pierre Blackburn, P.C., M.P.
Renee Sigouin
(613) 957-2128
2009 - 034254