2019-0799101C6 CLHIA 2019 Conference-Q6 Foreign Exempt Policies

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

Background

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.

Question

Will the CRA provide guidance as to how to apply the exempt test to policies that are not “life insurance policies in Canada”?

CRA Response

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.

Steven Szilagyi
2019-079910
May 14, 2019

All rights reserved. Permission is granted to electronically copy and to print in hard copy for internal use only. No part of this information may be reproduced, modified, transmitted or redistributed in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, or stored in a retrieval system for any purpose other than noted above (including sales), without the prior written permission of Canada Revenue Agency, Ottawa, Ontario K1A 0L5.

© Her Majesty the Queen in Right of Canada, 2019

Tous droits réservés. Il est permis de copier sous forme électronique ou d'imprimer pour un usage interne seulement. Toutefois, il est interdit de reproduire, de modifier, de transmettre ou de redistribuer de l'information, sous quelque forme ou par quelque moyen que ce soit, de façon électronique, mécanique, photocopies ou autre, ou par stockage dans des systèmes d'extraction ou pour tout usage autre que ceux susmentionnés (incluant pour fin commerciale), sans l'autorisation écrite préalable de l'Agence du revenu du Canada, Ottawa, Ontario K1A 0L5.

© Sa Majesté la Reine du Chef du Canada, 2019