| 913390 | |
| 24(1) | T. Murphy |
| (613) 957-3496 |
Attention: 19(1)
July 29, 1992
Dear Sirs:
Re: Death Benefit Funded With a Life Insurance Policy
This is in reply to your letter of December 2, 1991, concerning the tax implications to a corporation and its employees or former employees where a life insurance policy is used to fund death benefits. We apologize for the delay in responding to your letter.
Based on the information presented in your letter, we understand that the corporation will be the owner and beneficiary of life insurance policies on certain employees which will be used to fund death benefits payable to a particular employee's estate in the event that the employee dies either during the term of employment or within a specified period after the termination of employment. To assure the employees that the death benefits will be in place, the corporation will acquire policies which will be fully paid up before the end of a specified time frame. The employees may have an option to acquire the respective life insurance policy on their life for an amount equal to the cash surrender value of the policy after a specified period of employment.
Given that the employee may acquire the life insurance policy (presumably the beneficiary would be changed from the corporation to the employee), it is not clear if the intent of the arrangement described in your letter is to fund a death benefit payable by the corporation to its employees, to provide deferred compensation to the employees or to provide or fund retirement benefits to the employees.
You may wish to consider whether the arrangement would be considered to be an employee benefit plan, a salary deferral arrangement or a retirement compensation arrangement. All these terms are defined in subsection 248(1) of the Income Tax Act (the "Act"). We do not have sufficient information to make such a determination although, if appropriate, you may wish to consider a request for an advance income tax ruling in the manner set forth in Information Circular 70-6R2. We offer the following general comments which may be of assistance to you. These comments are based on the assumption that a particular arrangement is not an employee benefit plan, a salary deferral arrangement or a retirement compensation arrangement.
Generally, where the purpose of an arrangement is simply to provide a death benefit to an employee's estate or designated beneficiary and the arrangement is funded by a life insurance policy on the life of the employee, such that the corporation is the owner and the beneficiary of the life insurance policy and pays the premiums on the policy, the premiums paid by the corporation are not deductible expenses and no amount is included in computing the income of the employee. Upon the death of the employee there may or may not be a disposition by the corporation of its interest in the life insurance policy (this would depend on whether the policy is an exempt policy as defined in section 306 of the Income Tax Regulations). The amount of the death benefit, as defined in subsection 248(1) of the Act, is included in the income of the recipient under subparagraph 56(1)(a)(iii) of the Act.
The transfer of a corporate owned life insurance policy to an employee is subject to the provisions of subsection 148(7) of the Act, with the result that the corporation is deemed to receive proceeds of disposition equal to the value, as defined in paragraph 148(9)(g) of the Act, of the interest in the life insurance policy at the time of disposition and the employee is deemed to acquire it at a cost equal to that value. Where the interest in the policy includes an interest in the cash surrender value ("CSV") of the policy, value means the amount the holder would be entitled to receive if the policy were surrendered at that time.
The corporation is required by virtue of subsection 148(1) of the Act to include in income the amount, if any, by which the proceeds of disposition exceed the adjusted cost basis ("ACB"). ACB is defined in 148(9)(a) of the Act.
Paragraph 6(1)(a) of the Act will include in the income of the employee the amount by which the fair market value of the policy exceeds the amount paid by him for that policy. It should be noted that the fair market value of the life insurance policy may or may not be equal to its value as defined in paragraph 148(9)(g) of the Act. The amount so included in income will be added to the adjusted cost basis of the interest in the policy to the employee under subparagraph 148(9)(a)(iii) of the Act. Factors to be considered in determining the fair market value of an interest in a life insurance policy are set out in paragraphs 40 and 41 of Information Circular 89-3.
Please note that the above comments are of a general nature and, as stated in Information Circular 70-6R2, are not binding on the Department with respect to a particular situation.
Yours truly,
for DirectorFinancial Industries DivisionRulings DirectorateLegislative and Intergovernmental Affairs Branch