J.D. Jones (613) 957-2104
FEB 5 1990
Dear Sirs:
Re: Taxable Benefits Attributable to Employer's Payment of Group Life Insurance Premiums
This is in reply to your letter of January 18, 1990, wherein you requested our opinion on the tax implications of an employer's contribution of the premiums paid to a group term life insurance policy in the following situation.
Mr. X is an employee of Opco. As part of the compensation package for its employees, Opco has purchased a group life insurance policy from an insurance company and pays all of the premiums. Under the insurance policy, on the death of Mr. X, the insurer will pay to the beneficiary designated by Mr. X the sum of $25,000. In addition, the policy will also pay out proceeds in the event of the death of any of Mr. X's dependents. At the time Mr. X is enrolled in the plan, he is married with no children and the plan also insures Mrs. X for $10,000. The premium paid by Opco for that part of the insurance coverage on Mr. X's life is $200 for the year. An additional premium of $50 is payable in respect of the coverage on Mrs. X's life.
It is your view that, in the above situation, the policy does qualify as a "group term life insurance policy" within the meaning of subsection 248(1) of the Income Tax Act (the "Act") as the definition of "group term life insurance policy" with respect to a taxpayer means:
"... a group life insurance policy under which no amount is payable to a person other than the group policy holder as a result of contributions made to or under the policy by the employer of the taxpayer before the death or disability of the taxpayer".
In your view, even if the policy were to provide for automatic coverage of Mrs. X (rather than Mrs. X's coverage being optional) the payout on the death of Mrs. X is being made "as a result of contributions made to or under the policy by the employer of the taxpayer before the death or disability of the taxpayer" notwithstanding that the triggering event is not the death or disability of the taxpayer, but the death of the taxpayer's spouse.
In our view, where, under a group term life insurance policy, an amount becomes payable in the event of the death of either an employee or his dependent, it is necessary to examine the terms of the particular contract of insurance to determine whether the coverage in respect of the employee and his dependent is provided for in the same policy. If both are found to be payable under the same policy, we are of the opinion that such a policy is not a "group term life insurance policy" as defined by subsection 248(1) of the Act. We see this as the result where, under the terms of the policy, dependent coverage is automatic and is not acquired at the discretion of the employee. In this regard we note the definition of a "group term life insurance policy" in subsection 248(1) of the Act states, in part, "... a group life insurance policy under which no amount is valuable to a person other than the group policy holder ... before the death or disability of the taxpayer" (emphasis added). Accordingly, in the above situation, where dependent coverage is automatic, a payout in the event of Mrs. X's death would be made to a person (Mr. X, assuming he is the beneficiary) other than the policyholder (the employer) before the death or disability of the taxpayer (Mr. X). Accordingly, the total amount of the premium paid in respect of the policy by the employer would be a taxable benefit to the employee pursuant to paragraph 6(l)(a) of the Act.
However, certain plans provide that dependent coverage shall be provided, but that it may or may not be selected by employees. Where the dependent coverage is optional and the premiums in respect of the employee and dependent coverage are accounted for separately (as though under separate policies), we are prepared to view the coverage in respect of dependents as not being coverage under a policy which would otherwise be considered a "group term life insurance policy". That is, a policy which provides for insurance in respect of employees would not be disqualified from being considered a "group term life insurance policy" only because there is a provision in the policy for optional dependent coverage. In such cases, we are of the opinion that the amount of the employer's contribution towards dependent coverage (i.e, the premium which is not in respect of a "group term life insurance policy") would constitute a taxable benefit to the employee pursuant to paragraph 6(l)(a) of the Act. The amount of insurance payable in the event of the dependent's death would not be taken into account in the determination of a benefit under subsection 6(4) of the Act to the employee.
We trust our comments will be of assistance.
Yours truly,
ORIGINAL SIGNED BY ORIGINAL SIGNÉ PAR P.D. FUOCO
for Director Business and General Division Specialty Rulings Directorate Legislative and Intergovernmental Affairs Branch