| 19(1) | File No. 5-7815 |
| W.C. Harding | |
| (613) 957-3499 |
June 20, 1989
Dear Sirs:
This is in reply to your letter of April 3, 1989 wherein you requested our opinions on the use by an employer of an insurance policy to fund his obligations under a Retirement Compensation Arrangement (RCA). In particular you have asked for our comments with respect to a hypothetical situation wherein an "owner/employee" wishes to personally receive an additional pension over and above his "ordinary" pension entitlement. He funds this through a 19(1) universal' type of policy" which you state is "exempt" pursuant to section 148 of the Income Tax Act (the "Act"). This policy provides that any death benefit payable under it, in the event of the employee's death prior to age 82, must be used by the RCA custodian to purchase an annuity payable to the employee's spouse.
You have asked us to confirm:
A) that the payment by 19(1) of the death benefit to the custodian (i.e. his Company) would not be taxable under paragraph 12(1)(n.3) because the Company would be acting as a Trustee for the widow; and
B) the widow would be taxable on the amounts received out of the annuity. i.e. $10,000 per month for her life.
In order to reply to your question we have presumed that the employer in your situation is not a self-employed taxpayer. Otherwise, an employer-employee relationship may not exist and the provisions of the Act relating to RCAs may not have application.
We have further presumed that the "exempt" status of the policy under the provisions of section 148 of the Act is not material to your questions, that an actual trust arrangement will not exist, that the employer will hold the insurance policy as a custodian of a plan or arrangement, subject to the provisions of subsection 207.6(2) of the Act, and that he will subsequently hold the annuity in his name.
In these circumstances it is our opinion that:
a. the payment of a death benefit under the policy to the employer would be a payment received by him in respect of the interest in the policy and would, in accordance with the wording in paragraph 207.6(2)(d) of the Act, be considered as an amount received out of the RCA by the employer. Accordingly it would have to be included in the employer's income by virtue of paragraph 12(1)(n.3) of the Act;
b. any amounts paid out to the deceased employee's spouse would be included in her income as a death benefit under the provisions of subparagraph 56(1)(a)(iii) of the Act; and
c. the employer would be required to report the annuity payments pursuant to paragraph 56(1)(d) of the Act.
In the event that an actual trust is created such that the insurance policy is a subject property of the trust, the provisions of subsection 207.6(2) of the Act, will not have application. In this case the amount paid to the employer as a death benefit would be received by him as trustee and would not be included in income under paragraph 12(1)(n.3) of the Act. The annuity would then be acquired by the trustee as subject property of the trust. Payments made thereunder to the spouse would be taxable to her in accordance with paragraph 56(1)(z) of the Act.
We trust that the above comments will be satisfactory to your needs.
Yours truly,
for DirectorFinancial Industries Division Rulings Directorate