Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA. Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.
Principal Issues: Will the CRA provide guidance regarding the application of Exempt Test to life insurance policies issued on non-resident lives?
Position: Unable to provide guidance.
Reasons: Given that the information to determine the exempt status of a particular life insurance policy is only available in the accounts of the insurer, the onus is on the policyholder to establish that the policy qualifies as an exempt policy.
Author: Szilagyi, Steven
Section: 12.2, 56(1)(j), 138(12), Regulation 306
CLHIA Roundtable – May 2019
Question 6 - Application of Exempt Test to Life Insurance Policies issued on Non-Resident Lives
The preamble to Income Tax Regulation 306(1) indicates that a life insurance policy that is exempt from accrual taxation must, first and foremost, be a life insurance policy (other than an annuity contract, LIA policy, or a deposit fund administration policy). This Regulation does not reference a “life insurance policy in Canada” as defined in subsection 138(12) of the Income Tax Act, with the result that a life insurance policy “issued or effected on the life of a person not resident in Canada at the time the policy was issued or effected” can be an exempt policy under the Act. This would include any contract issued on a non-resident life insured by a Canadian insurance company, as well as life insurance contracts issued to non-resident persons by life insurers not carrying on a life insurance business in Canada (“non-resident insurer”).
Particularly with respect to policies issued outside of Canada, it is unlikely that policy values will be routinely determined by the insurer in accordance with the requirements of Canadian tax law where the policyholder is resident in, or immigrates to, Canada, making administration of the exempt test complex and introducing potential failures as the result of circumstances beyond the control of the policyholder or issuing insurance company.
For instance, where the policy is not issued in Canadian currency, it would appear that application of the exempt test could result in accidental failure of the test simply as a result of variations from year to year in currency conversion rates between the currency in which the policy is denominated and Canadian currency.
Will the CRA provide guidance as to how to apply the exempt test to policies that are not “life insurance policies in Canada”?
A life insurance policy is essentially a contract between the policyholder and the life insurance company that issues the policy. While there may be types of policies that are issued in the same form to many policyholders, each policy issued by an insurer is conceivably different from every other policy issued by the insurer. An "exempt policy" for income tax purposes, is a life insurance policy that satisfies certain criteria, set out in section 306 of the Income Tax Regulations ("Regulations"). In general terms, a taxpayer who holds an interest in a life insurance policy that is an exempt policy is not subject to annual accrual taxation under section 12.2 of the Income Tax Act (“the Act”) with respect to the income earned within the policy, and will not have an income inclusion under subsection 148(1) and paragraph 56(1)(j) of the Act, with respect to the proceeds received as a consequence of the death of the life insured under the policy.
We acknowledge that the rules for determining whether any particular life insurance policy is an exempt policy under section 306 of the Regulations are themselves complex. The rules in section 306 of the Regulations apply on a policy-by-policy basis and require actuarial calculations and information that only the issuing insurer will possess. The tests in section 306 of the Regulations may be applied at any time but the tests are generally performed by the insurer that issued the policy on each policy anniversary date.
A life insurance policy issued by a non-resident insurer is not specifically precluded from qualifying as an "exempt policy" and thus, such a policy could qualify provided the criteria in section 306 of the Regulations are satisfied. Given that the information to determine the exempt status of a particular life insurance policy is only available in the accounts of the insurer, the onus is on the policyholder to establish that the policy qualifies as an exempt policy. This would include supporting evidence that the life insurance policy satisfies the exempt policy tests in section 306 of the Regulations. The CRA's mandate is to administer the Act and does not include resolving issues between policyholders and their insurers about the terms and conditions of a particular life insurance policy.
May 14, 2019
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