Revenue Canada Taxation Head Office
K.B. Harding (613) 957-2129
May 13, 1987
Dear Sirs:
This is in reply to your letter of April 21, 1987 concerning the treatment of "split-dollar" insurance by Revenue Canada.
It is our understanding that split-dollar insurance refers to a policy where one person has an interest in the mortality gain received on death (employee) whereas another person (employer) has an interest in the cash surrender values of the policy.
Since you have not provided us with a specific set of facts we offer the following comments with respect to the treatment of split-dollar insurance policies.
Generally speaking, it is the Department's position that there may be a benefit to either the employee under paragraph 6(1)(a) of the Income Tax Act (Act) or to the shareholder under subsection 15(1) of the Act on split- dollar insurance policies. The benefit includes (as well as the net cost of pure insurance) an amount equal to the excess of the amount of the premiums paid by the employer in respect of the year over the increase in the cash surrender value of the policy during the year. In the case of an employee, a deduction from income is permitted to the Employer in respect of the amount of the benefit described above.
The Department does not consider the individual whose life is insured under a split-dollar insurance policy to be in receipt of a benefit in respect of the increase in cash surrender value. However, this position applies only where the corporation pays a portion of the annual premium that is equal to the lesser of the annual premium or the annual increase in the policy's cash surrender value and where the corporation is entitled to the cash surrender value of the policy on its termination or to a portion of the amount payable under the original policy on death equal to its cash surrender value immediately before death as well as to the dividends that arise in connection with the policy or anything substituted therefore.