2016-0651181E5 Life insurance policies "issued before 2017"

Principal Issues: Whether the phrase "issued before 2017" with respect to life insurance policies could be clarified.

Position: Provided general comments and guidelines.

Reasons: The phrase "issued before 2017" is not defined in the Act.

Author: Danis, Sylvie
Section: s. 148, Reg 1401, Reg 1403, Part III of the Regulations

XXXXXXXXXX                                                                                                                              2016-065118
                                                                                                                                                      Sylvie Danis
October 13, 2016

Dear XXXXXXXXXX:

Re:  2016 transitional rules for “exempt” life policies

This is in response to your June 2, 2016 letter wherein you requested a technical interpretation with respect to the 2016 transitional rules arising from recent changes to the taxation of policyholders of exempt life insurance policies. In particular, you asked us whether the reference to policies “issued before 2017” could be clarified.

This technical interpretation provides general comments about the provisions of the Income Tax Act (the Act) and related legislation (where referenced). It does not confirm the income tax treatment of a particular situation involving a specific taxpayer but is intended to assist you in making that determination. The income tax treatment of particular transactions proposed by a specific taxpayer will only be confirmed by this Directorate in the context of an advance income tax ruling request submitted in the manner set out in Information Circular IC 70-6R7, Advance Income Tax Rulings and Technical Interpretations.

In the context of life insurance policies, there are many references to dates such as coverage date, policy date, effective date and issue date. These dates are not defined in the Act but may be defined within the life insurance policies themselves or may obtain their meaning from the regulatory framework or jurisprudence. Accordingly, these dates could be different for different life insurance policies. When a life insurance policy comes into effect is a question of law. This determination may only be made based on a review of the particular life insurance policy, the applicable provincial legislation, and the facts of the particular situation.

For income tax purposes, the transition point between the post-2016 regime and the pre-2017 regime is when a life insurance policy is issued. The CRA has received requests from the insurance industry for clarification on how to interpret the phrase “issued before 2017” in respect of applications received by insurers in 2016. In response, solely for this specific purpose and having regard to policy intent, the CRA is prepared to adopt the following administrative guidelines for interpreting the phrase “issued before 2017”.

A newly issued life insurance policy (other than an annuity contract) can be considered “issued before 2017” by an insurer for purposes of section 148 of the Act, as well as sections 1401 and 1403 and Part III of the Income Tax Regulations, if the policy legally enters into effect in 2016. The CRA will also generally consider a policy to be “issued before 2017” for these purposes where all the following conditions are met.

1.    The application for the policy signed by the applicant(s) is received by the insurer in 2016 with all the information required for the insurer to begin underwriting of the insurance applied for.
2.    The premiums are calculated from the date of effect of the policy in 2016 and costs of insurance apply from that date.
3.    A payment in respect of the premium(s) is made in 2016.
4.    All the conditions (other than medical underwriting) for the issuance of the policy are met in 2016.|
5.    The insurer is legally obligated to pay the death benefit under the policy if the conditions for the payment of the death benefit are met in 2016.
6.    The policy is delivered to the applicant(s) by March 31, 2017.
7.    The policy or application does not define the issue date as a date other than a date in 2016.
8.    The first anniversary day of the policy must be as defined in subsection 12.2(11) of the Act, and must be in 2017.
 

In situations where the applicant(s) has temporary coverage pending the completion of the medical underwriting of the policy, the CRA will consider the fifth condition above to be met if the insurer is legally obligated to pay a death benefit under the temporary coverage equal to the amount of the death benefit under the policy being applied for if the conditions for the payment of the temporary death benefit are met in 2016.

We trust the above comments are of assistance.

Yours truly,

Jenie Leigh
for Director
Financial Industries and Trusts Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch

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