D. Duff 957-3498
19(1)
April 4, 1990
Dear Sirs:
This is in reply to your letter of March 1, 1990 in which you requested a technical interpretation regarding the tax consequences of a split-dollar insurance policy to be used to provide both life insurance protection and a supplementary pension for an employee.
The policy will be set up as described in the following paragraph.
An employer will establish a retirement compensation arrangement (RCA) trust. The RCA trust and the employer will acquire a universal life insurance policy on the life of an employee. The RCA trust will be the beneficiary of the cash surrender value (CSV) of the policy while the employee's estate or nominee will be the beneficiary of the death benefit. The employer will pay the portion of the insurance premium related to the death benefit.
We assume that none of this will be paid from the funds accumulated in the savings portion of the plan. The RCA trust will pay for the portion of the premium related to the CSV. The employer will contribute twice this amount to the RCA trust to pay both this amount of the premium and the refundable tax payable pursuant to section 207.7 of the Income Tax Act (the Act). On retirement of the employee, the RCA trust will receive the amount of the CSV and will pay the supplementary pension to the employee from these funds.
Our responses to your specific questions are as follows:
1. Provided the trust is governed by the RCA, it will be considered to be an RCA trust per subsection 207.5(1) of the Act.
2. Providing the policy is an exempt policy, the earnings accumulating in the fund will not be income of the trust for the purposes of determining the refundable tax of the RCA.
3. The employer's contributions to an RCA trust will be deductible pursuant to paragraph 20(1)(r).
4. The portion of the premium related to the death benefit and paid directly by the employer will be considered to be employment income to the employee pursuant to paragraph 6(1)(a) of the Act and deductible to the employer pursuant to 18(1)(a) of the Act. At this time we make no comment on the determination of this amount and recognize that the amount of the premium allocated to the death benefit coverage may change from year to year.
5. Since the total cost of the death benefit will be, in effect, paid by the employee and the benefit is payable directly to the employee's estate or nominee, the death benefit will not be considered to have been received as a distribution from the RCA nor will it be subject to tax in the beneficiary's hands.
These opinions reflect our understanding of the law as it applies generally, and, in accordance with paragraph 24 of Information Circular 70-6R do not form an advance income tax ruling and are not binding on the Department.
We trust these comments will be of assistance to you.
Yours truly,
W. Douglas for Director Financial Industries Division Rulings Directorate