In response to a query as to why the taxpayer was issued at T5 slip for the receipt on the maturity of a term life insurance policy of a return of premiums (ROP) benefit (i.e., an amount equal to the total previously paid premiums under the policy), CRA provided a general technical overview of the provisions relevant to computing a policy gain under s. 148(1), and then referred the correspondent to White for further illumination. In White, Mogan J confirmed that substantially all (i.e., $23,888) of the $24,909 ROP benefit received by the taxpayer on the maturity of his term life insurance policy was taxable to him given that the ACB of his policy had been reduced to $1,021 by the net cost of pure insurance (NCPI) for his policy.
In elaborating on this result, Morgan stated (at paras. 23-24):
The Appellant naturally thought of the ROP benefit ($24,909) as a return of non-taxable dollars. …
[T]he phrase “return of premium” may be an accurate description of the maximum amount received by the Appellant upon the expiry of the term but it is misleading for the following reason. A very large portion of all premiums paid by the Appellant was for life insurance. He had full value for that very large portion of premiums because his life was insured for 22 years. Therefore, it is not reasonable to think of the insurer as paying back (upon the expiry of the term) any of the premiums for which it had already provided full value. What the insurer paid as a benefit upon the expiry of the term was not, in a business sense or in an income tax sense, any part of the premiums for life insurance. … It was part of the insurer’s earnings.