28 September 2023 CLHIA Roundtable Q. 4, 2023-0974191C6 - IPPs & Investments

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: 1. Is a life insurance policy, on the life of a plan member or a person related to that member, a prohibited investment for a trust governed by an RPP? 2. Would the CRA consider a recommendation to the Minister to impose additional conditions pursuant to subsection 147.1(5) which will prohibit such a trust from holding a life insurance policy ? 3. How to prepare an actuarial valuation report where an IPP holds an insurance policy as a permitted investment?

Position: 1. No. 2. No. 3. Information provided.

Reasons: 1. Legislation. 2. Prior positions. 3. Prior positions.

CLHIA CRA Roundtable September 28, 2023

Question 4 – IPPs & Investments

Question 4 a)

Paragraphs 8514(1)(b) and (c) of the Income Tax Regulations (the “Regulations”) contain wording that could be interpreted as prohibiting a registered pension plan (“RPP”) from holding a life insurance policy based on the life of a plan member. Can the CRA confirm that a life insurance policy, on the life of a plan member or a person related to that member, is not a prohibited investment for a trust governed by an RPP, including an individual pension plan (“IPP”)?

CRA Response

Yes. The permissible investment rules under paragraph 8502(h) of the Regulations and the prohibited investment rules under section 8514 of the Regulations do not prevent a trust governed by an RPP, including an IPP, from holding life insurance policies on the life of a plan member, or a person related to a member.

Question 4 b)

If paragraph 8502(h) and section 8514 of the Regulations do not prohibit a trust governed by an RPP from holding a life insurance policy, would the CRA consider a recommendation to the Minister of National Revenue (the “Minister”) to impose additional conditions pursuant to subsection 147.1(5) of the Act which will prohibit such a trust from holding a life insurance policy?

CRA Response

The CRA is currently not considering a recommendation to the Minister to impose a condition under subsection 147.1(5) of the Act which will prohibit a trust governed by an IPP from holding a life insurance policy. We will advise the industry if there is any change to this position in the future.

Question 4 c)

If an insurance policy is a permitted investment, we have the following questions in relation to the preparation of actuarial valuation reports (“AVRs”):

Question 4 c) i)

Subparagraph 8515(7)(e)(ii) of the Regulations states that an AVR based on maximum funding rules assumes that, in the case of a restricted funding member, the member will survive to the time the member’s retirement benefits commence to be paid. Would an investment in a life insurance policy using IPP funds be considered a violation of subparagraph 8515(7)(e)(ii) of the Regulations because the mortality rates in the pricing of the insurance premiums are not based on the same assumption?

CRA Response

No. A life insurance policy, held as an investment by a trust governed by an IPP, does not violate the maximum funding valuation rules (“MFV rules”) under subsection 8515(7) of the Regulations. The MFV rules apply to the annuity factor used to calculate the actuarial liabilities under designated pension plans, for the purpose of determining whether a contribution is an eligible contribution under subsection 147.2(2) of the Act.

Question 4 c) ii)

Pre-retirement survivor benefits under the MFV rules are intended to be funded at the time of a member’s death. With a life insurance policy, the funds for the death benefit come from the insurance company in lieu of a terminal employer contribution. The insurance premiums come from the IPP’s assets which may result in additional employer contributions while the member is active in the plan. Would the CRA consider a life insurance policy held in an IPP a violation of the MFV rules because it constitutes a pre-funding of an IPP?

CRA Response

No. As stated in response 4(c)(i), a life insurance policy, held as an investment by a trust governed by an IPP, does not violate the MFV rules under subsection 8515(7) of the Regulations. Also, as mentioned in question 4(b), the CRA may review whether holding certain life insurance policies, in the context of an IPP and the designated pension plan funding limits, is appropriate in the future.

Question 4 c) iii)

What is the CRA’s position on the death benefit from an insurance policy being very different from the pre-retirement death benefit under an IPP?

CRA Response

A trust governed by an IPP is the beneficiary of the life insurance policy. On the member’s death, the death benefits a beneficiary under the IPP would be entitled to are included in the beneficiary’s income under subparagraph 56(1)(a)(i) of the Act or may be transferred, if payable as a lump sum, to a surviving spouse under subsection 147.3(7) of the Act. The residual assets in the IPP after all benefits are paid are surplus assets that must be distributed under subparagraph 8502(d)(vi) of the Regulations when the plan is wound up, and must be included in the income of the person who receives them under subparagraph 56(1)(a)(i) of the Act. The trustee of an IPP has a fiduciary duty to ensure that plan assets are invested in a reasonable and prudent manner in order to ensure that the plan will have sufficient assets to provide the benefits under the plan terms as registered.

Question 4 c) iv)

Is there a requirement for an independent actuarial assessment of the FMV of an insurance policy each year for the purposes of filing the annual information return (T244)?

CRA Response

No. The Registered Plans Directorate will accept the value from the latest AVR. The CRA may audit the plan assets reported on the T244 form, or in an AVR, to ensure that life insurance policies are appropriately valued.