G. Thornley (613) 957-2130
June 10, 1987
Dear sirs:
Re: Split-dollar insurance
This is in reply to your letter of April 13, 1987 in which you take issue with the position taken by the Department with respect to split-dollar insurance as set out in a recent letter to another insurance company, a copy of which we had supplied you.
We have considered the various issues raised in your letter and have given due consideration to each of them. However, the Department's position on the issues which arise in connection with split-dollar insurance policies remains unchanged.
In the situation where an annual premium paid by an employer is equal to or less than the increase in the cash surrender value of that policy, a limited benefit accrues to the employee where the employer is entitled to all policy dividends which may arise and is also entitled to the cash surrender value of the policy should it be terminated before the employee's death. (And where the employer is entitled, in the event of the employee's death, to a portion of the face value payable on death out of that policy that is equal to the cash surrender value of the policy immediately before death.) Should these conditions exist in a particular arrangement then the employee is only entitled to the mortality gain on the policy. The latter in itself constitutes a benefit to the employee. However, 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 Income Tax Act and Regulations has come a requirement that the companies produce and supply figures on the net cost of pure insurance which is what is at issue in the above illustration. This matter is presently under review.
Should an employee be entitled to more than the mortality gain described above then the benefit to the employee would be even greater. For instance, if in the event of death, the employee's estate were entitled to the full face value of the policy then the annual benefit to the employee will be equal to all or substantially all of the portion of the annual premium paid by the employer.
The situation used above to illustrate the Department's position was based on the assumption that the annual premium was equal to or less than the annual increase in cash surrender value as a simple means of illustrating our points. However, should a premium in a particular year be greater than the increase in cash surrender value, our comments are substantially the same with only minor variations. The situation where an employer pays a portion of an annual premium that is greater than the increase in the cash surrender value was discussed in our earlier letter referred to above.
We wish to make one further point. In the event of a death and where the employer receives cash from an insurance company, whether it be the pay-out of the accumulated dividends, a portion of the original policy or the face amount of a term life policy purchased with some of the accumulated dividends, should the employer decide to pay an amount equal to, less than or more than those proceeds to the employee's estate, that entire sum will constitute a benefit to the employee's estate.
We trust these comments will be of assistance.
Yours truly,
for Director Reorganizations and Non-Resident Division Specialty Rulings Directorate Legislative and Intergovernmental Affairs Branch