Oct 25 1988 B. Fioravanti (613) 957-2103
OCT 25 1988
Dear Sirs:
This is in reply to your letter of August 25, 1988 requesting our view with respect to split-dollar insurance and taxable benefits that may be derived therefrom.
It is our understanding that split-dollar inaurance 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.
The Department's position with respect to split-dollar life insurance policies is that there may be either a benefit under paragraph 6(1)(a) of the Income Tax Act (the "Act"), for employees, or a benefit under subjection 15(1) of the Act, for shareholders, in each year of the policy. 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 corporation 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 allowed to the employer in respect to the amount of the benefit described above, provided the amount is reasonable in the circumstances.
Generally, 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 the cash surrender value attributable to the premiums paid by the corporation. However, this position applies only where the corporation pays premiums equal to the annual increase in the policy's cash surrender value and the corporation is entitled to the cash surrender value on its termination or to the 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).
Usually, in these arrangements the employee or shareholder is entitled to the mortality gain on the policy. As noted above, it has always been the Department's position that this constitutes a benefit to him. In the past, there was no easy means of calculating this benefit and it tended to be ignored. With changes in recent years to the insurance provisions of the Act and Regulations has come a requirement that the companies produce and supply figures on the net cost of pure insurance.
We trust that the foregoing will be of assistance.
Yours truly,
ORIGINAL SIGNED by
Wm. R. McColm
for Director Small Business and General Division Specialty Rulings Directorate Legislative and Intergovernmental Affairs Branch