31 January 1994 External T.I. 9336435 F - Disability Benefit and Group Insurance Policy

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.

RULINGS DIRECTORATE CORRESPONDENCE SUMMARY

PRINCIPAL ISSUES:

Whether or not an amendment to a group insurance policy to pay special disability benefits either as an advance or as a claim in itself would render this transaction and future benefit payments taxable under the Income Tax Act.

Whether or not a loan could be made to provide such special disability benefits and if so whether or not such a loan would be taxable under the Income Tax Act.

POSITION TAKEN:

The amendment should not result in a disposition of the policy provided the death benefit under the policy is reduced by the amount of the special benefit but is not otherwise altered and that it does not result in any additional cost to the policyholder/employer or the insured.

It is not clear whether such a loan can be made with respect to a group insurance policy.

REASONS FOR POSITION TAKEN:

In the circumstances noted above the amendment would not appear to be of such a fundamental nature as to result in a disposition of the group insurance policy.

The special payments, if treated as policy loans for purposes of the Act, should be exempted from tax pursuant to 148(9)(c)(vii) of the Act.

Where the loan is made at the discretion of the insurer rather than pursuant to the terms of the policy it would not be treated as a policy loan.

LEGAL:

December 18,1989 - 7148-3 March 10, 1988 - 7012.2-3

FINANCE OPINION:

In a letter dated October 25, 1989, Finance indicated that they did not have any policy concern.

JURISPRUDENCE:

N/A

RCT PUBLICATIONS:

N/A

HAA NUMBER:

5720-1

Public Service of Canada Management Insurance Plan Board of Trustees  Ottawa, Ontario K1A 0R5

Attention:  Mr. David Swayze

Dear Sirs:

This is in reply to your letter of December 10, 1993 wherein you requested our views on the treatment under the Income Tax Act (the "Act") with respect to the payment of a special disability benefit to an individual covered under a group life insurance policy. This special disability benefit could be provided for by making an amendment to the group insurance policy to add a special terminal illness benefit provision in situations where the insured's death will occur within twelve months of receiving the special benefit payment. An alternative approach which you mentioned in your letter is to pay this special disability benefit as a loan to the insured.

We are of the view there are no unfavourable income tax consequences under the Act with respect to an individually owned life insurance policy where the special benefit payment made by a life insurance company takes the form of a loan, with an assignment of the policy to the insurer as security, provided such a loan is made at the discretion of the life insurance company rather than pursuant to the terms of the life insurance policy.

It is not clear to us that the individual insured under such a group policy would be able to assign his/her interest in a group life insurance policy to the life insurance company as security for a loan referred to above. Consequently, this option may not be possible in your situation. You may want to clarify this with your life insurance company.

An amendment to a group life insurance policy to provide for a disability option under which a special benefit payment would be made in cases of an insured who is suffering from a terminal illness and has received medical certification that death will occur within twelve months of receiving the special benefit payment would not, in itself, appear to be of such a fundamental nature as to result in a disposition of an interest in the policy by the policyholder/employer or the insured, where:

-     the amount of the death benefit under the policy prior to amendment is reduced by the amount of the special payment but is not otherwise altered, and

-     this does not result in any additional cost to the policyholder/employer or the insured.

With respect to the nature of such a special benefit payment, it would appear that it could constitute a "policy loan" as defined in paragraph 148(9)(e) of the Act. As such, pursuant to subparagraph 148(9)(c)(ii) of the Act, such a payment could give rise to a disposition in relation to an interest in the policy. However, to the extent that a group life insurance policy has no cash surrender value, the "proceeds of the disposition", as defined in subparagraph 148(9)(e.2)(ii) of the Act, would be nil and such a payment would thus not be taxable when received by the insured.

If such a payment is not repayable by the insured, it is also possible that it could constitute a disability benefit under the policy which, by virtue of subparagraph 148(9)(c)(vii) of the Act, would not be a disposition in relation to an interest in the policy and would therefore not be taxable when received by the insured.

The foregoing is an expression of opinion only and is not binding on the Department and may not necessarily apply in the context of a specific situation. We hope this will be of assistance to you. Should you wish to proceed on an advance income tax ruling basis, an advance ruling would entail our review of the existing group life insurance policy, the specific proposed amendment and a request prepared in accordance with Information Circular 70-6R2.

Yours truly,

Section ChiefFinancial InstitutionsFinancial Industries DivisionRulings DirectorateLegislative and Intergovernmental Affairs Branch