2018-0780421M4 Life insurance - refund of premium benefit

Principal Issues: Whether an amount received as a refund of premium benefit with respect to an interest in a life insurance policy that has matured is included in income.

Position: Yes, to the extent that the proceeds of the disposition exceed the adjusted cost basis (ACB) of the interest in the policy.

Reasons: Subsection 148(1) includes in computing income the excess of the proceeds of the disposition over the adjusted cost basis on the disposition of an interest in a life insurance policy.

Author: Danis, Sylvie
Section: 148(1)

November 7, 2018

XXXXXXXXXX

Dear XXXXXXXXXX:

The office of the Right Honourable Justin Trudeau, Prime Minister of Canada, sent me a copy of your correspondence about the fairness of the taxation of life insurance policies. Thank you for your understanding regarding the delay of this response.

As Minister of National Revenue, my goal is to make sure the Canada Revenue Agency (CRA) offers services that are fair, helpful, and easy to use. This continues to be my priority and my focus as I devote all my efforts to delivering tangible results to taxpayers.

In your correspondence, you refer to a letter from a life insurer about the maturity of a life insurance policy, and you express concern about the amount you will need to report as income on your 2018 income tax and benefit return.

The taxation of life insurance products can be complex due to the wide variety of products available in the marketplace, many of which are structured to meet individual preferences and needs. For example, some products are designed to be an investment and savings vehicle as well as provide a death benefit.

In this situation, the insurer attributes part of the policyholder’s premiums to the policy’s savings component, which may accumulate over the term of the policy. Under the Income Tax Act, the savings accumulated in a life insurance policy are generally taxable unless the policy is considered exempt and the savings are paid to a named beneficiary as part of a death benefit.

In broad terms, policies that are exempt are primarily designed to fund a death benefit, rather than to be an investment and savings vehicle. However, even if a policy is exempt, any accumulated savings are taxable to the policyholder if the policy is surrendered or matures before the death of the insured person. A policy is said to have been “disposed” if it is surrendered or matures before the death of the insured person.

When a policy has been disposed, the insurer must report the amount of the gain on a T5 slip, Statement of Investment Income, which is issued to the policyholder. The insurer should be able to provide information on how it calculated the proceeds of the disposition, the adjusted cost basis, and the gain on the disposition. These amounts are all calculated in accordance with the Act. I note the insurer’s letter to you, dated September 7, 2018, identifies these amounts and includes a contact number to call for more information.

I appreciate that these rules are complex, and I have sent a copy of your correspondence to the CRA’s Income Tax Rulings Directorate (ITRD) for review. The ITRD assists taxpayers in understanding complex matters related to the Act. Mr. Bob Naufal, Manager of the Financial Institutions Section of the ITRD, is aware of your correspondence and will be pleased to answer your questions. You can call Mr. Naufal directly at 613‑670‑9048.

I am also enclosing a copy of a letter that the CRA wrote to another taxpayer with a situation similar to yours.

I appreciate the opportunity to respond to your concerns and trust the information I have provided is helpful.

Sincerely,

The Honourable Diane Lebouthillier

Enclosure

Sylvie Danis
613-670-9047
2018-078042

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