Principal Issues:
1. Whether a life insurance policy issued by a different carrier that replaces a life insurance policy that existed on April 26, 1995 would affect or result in a loss of grandfathering provided for in paragraph 131(1)(b) of S.C. 1998, c.19.
2. Will our response to the first question be altered if the replacement policy provided for an increase in coverage?
Position:
1.Not necessarily
2. No
Reasons:
Grandfathering for the purposes of the stop loss rules is fact dependant and will be determined on a case-by-case basis. The shares acquired, redeemed or cancelled will be grandfathered where, in accordance with subparagraph 131(1)(b)(iii) the "main purpose" of the insurance policy as at April 26, 1995 was to fund the acquisition, redemption or cancellation of shares owned by the shareholder on April 26, 1995. Accordingly where the policy in existence on April 26, 1995 met the requirements of paragraph 131(1)(b) of S.C. 1998, c.19 the replacement of that insurance policy with another life insurance policy will not be relevant.
XXXXXXXXXX 2005-012431 Manjula Vethanayagam June 28, 2005
Dear XXXXXXXXXX:
Re: Stop-Loss Rules - Grandfathering Provisions
This letter is in response to your e-mail dated March 30, 2005, concerning grandfathered shares for the purposes of the stop loss rules referred to in subsections 112(3) to 112(3.2) of the Income Tax Act (the "Act"). In particular, you would like to know if a life insurance policy issued by a different carrier that replaces a life insurance policy that existed on April 26, 1995, would affect or result in a loss of grandfathering provided for in paragraph 131(1)(b) of S.C. 1998, c.19. You have also requested our opinion on whether increasing the coverage of the replacement policy will alter our response to your initial question.
Our Comments
While we can provide you with some general comments we cannot address the tax implications of your particular situation. Should you wish confirmation of the income tax consequences with respect to a specific proposed transaction you may request an advance income tax ruling in the manner set out in the Department's Information Circular 70-6R5 dated May 17, 2002. Questions concerning the proper determination of the income tax consequences of a completed transaction should be addressed to the appropriate local tax services office.
As indicated in Income Tax Technical Newsletter, Issue No. 12 dated February 11, 1998, to qualify for the grandfathering provisions a taxpayer must demonstrate that certain conditions related to a life insurance policy existed on April 26, 1995. It is possible that subsequent actions in respect of the policy may be relevant in determining whether the conditions (i.e., the main purpose test) set out in the grandfathering provisions under paragraph 131(1)(b) of S.C. 1998, c.19 existed on April 26, 1995. However, it is our view that any further modifications, alterations, cancellation of such a policy would not, in and of themselves, result in the loss of grandfathering. Accordingly, changes such as converting the existing policy to a universal life policy, replacing the existing policy with a new life insurance policy, or increasing the amount of life insurance either by increasing the death benefit payable under the existing policy or adding a new life insurance policy with additional death benefit would not preclude the grandfathering provisions from continuing to apply if the conditions outlined in paragraph 131(1)(b) of S.C. 1998, c. 19 existed on April 26, 1995.
While we hope that our comments will be of assistance to you, the comments referred to above are not binding on the Canada Revenue Agency.
Yours truly,
F. Lee Workman
Manager
Charitable and Financial Institution Sectors
Financial Sector and Exempt Entities Division
Income Tax Rulings Directorate
Policy and Planning Branch