Principal Issues: Whether a split-dollar arrangement creates an advantage for the purpose of proposed subsection 207.5(1)?
Position: Possible but it is a question of fact.
Reasons: There is a large variety of split-dollar
FINANCIAL STRATEGIES AND INSTRUMENTS ROUNDTABLE 5 OCTOBER 2012
APFF CONFERENCE 2012
Question 5 - Retirement compensation agreement and change to Budget 2012
In the March 29, 2012 Budget, it was proposed that retirement compensation arrangements ("RCAs") be subject to the penalties set out in Part XI.0.1 of the Income Tax Act (the "Act"), that is, "prohibited investments" and "advantages" currently applicable to RRSPs, RRIFs and TFSAs.
In the Budget Plan, Annex 4, the Minister stated some examples of strategies that would be targeted by those measures including the following: “Other arrangements use insurance products to allocate costs to the arrangement for benefits that arise outside the arrangement.”
According to our understanding, the concept of "advantage" as defined in subsection 207.01(1) will not apply to a co-ownership agreement or shared/split ownership arrangement where the RCA holds the cash surrender value of the insurance contract and another person or entity holds the death benefit, where the holder of the death benefit adequately finances the mortality costs. In other words, if the costs and guarantees of an RCA financed by split-premium life insurance are properly allocated, the concept of "advantage" in 207.01(1) should not apply since each party has paid the premium corresponding to the benefit the party will receive.
Question to the CRA
Does the CRA agree with our analysis?
CRA Response
On August 14, 2012, the Department of Finance released the Legislative Proposals (footnote 1) regarding the "prohibited investment" and "advantage" rules in the case of RCAs.
Proposed new subsection 207.62(1) provides for a tax liability if an "advantage" in relation to an arrangement is granted in a calendar year to a retirement compensation arrangement, a specified beneficiary or any person who does not deal at arm’s length with the specified beneficiary.
A definition of "advantage” is being added to subsection 207.5(1). Under that proposed definition, an advantage includes inter alia:
- any benefit, subject to exceptions, that is conditional in any way on the existence of the arrangement;
- any benefit that is an increase in the total fair market value of the subject property of the arrangement if it is reasonable to consider, having regard to all the circumstances, that the increase is attributable, directly or indirectly, to a transaction or event or a series of transactions or events one of the main purposes of which was to enable a person or a partnership to benefit from a provision of Part XI.3, or from the exemption from tax under paragraph 149(1)(q.1), if the transaction, event or series would not have occurred in a normal commercial or investment context in which parties deal with each other at arm’s length and act prudently, knowledgeably and willingly.
- an RCA strip, in respect of a retirement compensation arrangement.
The definition of an "RCA strip, in respect of a retirement compensation arrangement” is being added to subsection 207.5(1) and includes the amount of a reduction in the fair market value of subject property of the arrangement, if the value is reduced as part of a transaction or event or a series of transactions or events one of the main purposes of which is to enable a specified beneficiary of the arrangement, or a person or a partnership who does not deal at arm’s length with the specified beneficiary, to benefit from a provision of Part XI.3.
We believe it is possible that the concept of advantage as defined in subsection 207.5(1) would apply in certain circumstances to the situation presented. However, based on the facts provided and given that the terms and conditions of these types of contracts may vary significantly, we are unable to comment on the application of the concept of advantage to co-ownership agreements or split-premium life insurance arrangements. An analysis of all the documentation and contracts in the context of an advance ruling request is necessary in order to be able to pronounce on such an issue.
Catherine Ayotte
(819) 243-7306 / (613) 957-8962
2012-045314
FOOTNOTES
Due to our system requirements, footnotes contained in the original document are reproduced below:
1 Legislative Proposals Relating to the Income Tax Act and Regulations, Department of Finance Canada, August 14, 2012.