24 December 2004 External T.I. 2003-0054571E5 - Critical Illness Insurance

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 a critical illness policy be a sickness policy for purposes of the Act if benefits are paid on expiry as described.

Position: Where the terms and conditions of a critical illness policy provide benefits only in the event of critical illness and the provision of that insurance is clearly the purpose of the contract, the CRA has generally taken the position that the policy is a sickness policy for purposes of the Act. The presence of a "return of premium on expiry" benefit in a CI policy that provides for a benefit that is solely a return of premiums paid-in is unlikely, in and of itself, to cause a CI policy to be viewed as having a different character for tax purposes.

Reasons: The characterization of a critical illness policy for purposes of the Act depends upon all the terms and conditions of the policy and the applicable insurance legislation.

XXXXXXXXXX 							2003-005457
R. Maley
December 24, 2004

Dear XXXXXXXXXX:

This is in reply to your letter of December 30, 2003 requesting our comments on two hypothetical insurance arrangements, each involving a critical illness (CI) insurance policy providing for a benefit on maturity, calculated with reference to premiums paid-in.

As we understand it, in each arrangement, a hypothetical CI policy would provide for a lump sum benefit upon the insured surviving a specific period after diagnosis of a pre-determined illness before the insured reaches age 75. The policyholder would pay premiums until the insured reaches age 75 at which time the policy expires. Prior to the insured reaching age 75, the policy remains in force only if premiums are paid as required.

You have asked that we consider the following variations to the hypothetical policy, and advise whether we agree that the policy would be a "sickness" policy for purposes of the Income Tax Act ("the Act").

In the first arrangement, the policy provides that a benefit equal to 100% of premiums paid-in will be returned if the insured survives to age 75 provided that the policy is in force and no lump sum benefits have been paid pursuant to the policy due to the occurrence of a critical illness of the insured. You refer to this benefit as "return of premium on expiry"

In the second arrangement, the policy would provide for an optional reduced return of premium on expiry benefit payable if the insured survives to age 65 provided that the policy is in force and no lump sum benefits have been paid pursuant to the policy due to the occurrence of a critical illness of the insured. The amount of the optional benefit would be computed with reference to the age of the insured at the time the option is exercised with 50% being payable at age 65, 55% at 66, 60% at 67 etc., such that the benefit is 100% of premiums paid-in when the insured reaches age 75. The policy would expire at whatever time the option is exercised.

Written confirmation of the tax implications inherent in particular transactions is given by this Directorate only where the transactions are proposed and are the subject matter of an Advance Income Tax Ruling request. Where the particular transactions are completed, the inquiry should be addressed to the relevant Tax Services Office. However, we are prepared to provide the following comments.

As insurance products vary broadly in their terms and conditions, it must always be kept in mind that the characterization of a particular policy, including a CI policy, depends upon all the terms and conditions of the policy and the applicable insurance legislation. That being said, where the terms and conditions of a critical illness policy provide benefits only in the event of critical illness and the provision of that insurance is clearly the purpose of the contract, the CRA has generally taken the position that the policy is a sickness policy for purposes of the Act (e.g., see rulings opinion E2003-0026385). In our view, the presence of a "return of premium on expiry" benefit in a CI policy that provides for a benefit that is solely a return of premiums paid-in (including an optional reduced benefit such as that described in the hypothetical second arrangement), would be unlikely, in and of itself, to result in the CI policy being viewed as having a different character for purposes of the Act. Of course, it would be a question of fact, determined with reference to all the terms and conditions the particular policy, whether a particular benefit represents solely a return of premiums.

We trust that our comments will be of assistance to you. However, as stated in paragraph 22 of Information Circular 70-6R5, this opinion is not a ruling and consequently is not binding on the Canada Customs and Revenue Agency in respect of any particular situation.

Yours truly,

F. Lee Workman
Manager
Financial Institutions
Financial Industries Division
Income Tax Rulings Directorate
Policy and Planning Branch