Principal Issues: When a taxpayer subscribes to an annuity contract and a life-insurance policy with the same insurer, are both contracts considered to be a non-exempt life-insurance policy?
Position: Question of facts.
Reasons: Depends on whether the contracts are interdependent and interconnected one from the other.
FINANCIAL STRATEGIES AND INSTRUMENTS ROUNDTABLE, OCTOBER 10, 2014
2014 APFF CONFERENCE
QUESTION 7
INSURED ANNUITY
It has been stated in the past, in a technical interpretation issued by the CRA in 1996 (footnote 1), that if the terms of a life insurance policy and an annuity contract were such that neither contract would be issued without the other, (especially where both contracts are issued by the same insurer) it might be possible to conclude that they represented the issue of one non-exempt life insurance policy. This reclassification of the contracts would result in the loss of the main tax advantages and render the transaction ineffective.
For the implementation of annuity insurance, it is standard practice in the financial services brokerage industry that the broker seeks the best life insurance and annuity product at the best price for his or her client. Occasionally, the same insurance company offers the best price for each product for a given situation. The results of the research are obtained using independent tools updated daily. In addition, the two products are not subscribed to simultaneously, since the life annuity is subscribed to only after the life insurance contract has been issued.
Questions to the CRA
a) Given the evolution of tax legislation, would the CRA maintain the same position in a context where the two insurance products concerned are subscribed to from the same insurance company, one after the other, and simply because the products have the best pricing on the market in a given situation?
b) If so, what would be the key elements for the CRA to allow the taxpayer to demonstrate that each of the contracts subscribed to was priced and selected independently?
CRA response
Where an annuity contract and a life insurance policy are independent of each other, they will not be considered as one and the same contract. This is the case even if they were subscribed for with the same insurance company.
In order to determine whether two contracts are independent of one another, the facts and circumstances surrounding the conclusion of the contracts must be analyzed.
The fact that two contracts were not subscribed for simultaneously is an element which is taken into consideration. However, this element does not by itself guarantee a conclusion that the two contracts are independent of each other. In the absence of a specific case, we are unable to identify which factors are decisive.
Catherine Ayotte
819-243-7306
2014-053828
FOOTNOTES
Due to our system requirements, footnotes contained in the original document are reproduced below:
1 CANADA REVENUE AGENCY, Technical Interpretation 9606425--Leveraged Life Insurance, April 9, 1996