SESSION 25 • LIFE AND LIVING BENEFITS PRODUCTS: THE PERFECT UNION?
SPEAKER(S)/CONFÉRENCIER(S) : Frederic Jacques, Munich Re
Michael Kirkwood, Manulife Financial Ron Sanderson, CLHIA
CANADA’S LEGAL AND TAX FRAMEWORK (1)
Stand-alone ʺvanillaʺ CI/LTC looks like accident and sickness insurance, but…
– A&S has historically reimbursed expenses or replaced lost income
– lump-sum CI benefits and ʺnon-accountableʺ LTC benefits are not reimbursement coverages
(indemnities)
– CI/LTC may not have fit within the provincial definition of A&S insurance
CANADA’S LEGAL AND TAX FRAMEWORK (1a)
“… should the (CI) plan not be considered sickness insurance under the laws of British Columbia the payment of the premiums by the employer will likely result in a taxable benefit for employees.”
- CRA Technical Interpretation 2005-0112781E5,February 2, 2005
Why not refer to classes in federal Insurance Companies Act?
CANADA’S LEGAL AND TAX FRAMEWORK (2) 2004: Changes to CCIR ʺclasses of insuranceʺ definitions for A&S incorporate ʺpayment of a certain sum or sums in the event of
– bodily injury or death caused by accident, and
– sickness or disability other than as a result of an accidentʺ
CANADA’S LEGAL AND TAX FRAMEWORK (3)
The Income Tax Act doesn’t address personally-funded A&S benefits - the focus is on taxable transfer of value via employer-funded benefits
– Employer-funded premiums for lump sum group A&S benefits taxable under new 6(1)(e.1) after 2012
– Personally-funded premiums for ʺvanillaʺ CI/LTC benefits should be viewed as non-deductible
ʺpersonal or living expensesʺ, such that benefits are not-taxable
– Are ʺrefunds of premiumʺ A&S benefits under ICA? Do they lead to taxable ʺinvestment contractʺ status?
CANADA’S LEGAL AND TAX FRAMEWORK (4)
Life insurance policies have an inherent investment component
– Risk costs (NCPI, supplementary benefits) are excluded from the ʺadjusted cost basisʺ of the investment
– ʺProceedsʺ– ACB = taxable ordinary income – ʺProceedsʺ excludes
• Death benefits
• Payment under a policy as a disability benefit or as an accidental death benefit
CANADA’S LEGAL AND TAX FRAMEWORK (5) An LTC benefit payment from a life insurance policies is probably payable due to death or
disability, and is probably (99%+?) non-taxable… … regardless of whether it is a lump sum or
CANADA’S LEGAL AND TAX FRAMEWORK (6) A CI benefit payment from a life insurance
policies is not payable due to death or disability, and is probably (90%+?) (partially) taxable…
… unless you define a CI benefit within a life insurance policy in terms of disability
CANADA’S LEGAL AND TAX FRAMEWORK (7)
A CI-ROP benefit payment within a life insurance policies may be payable due to death, and would appear to be non-taxable in that context
But, a CI-ROP benefit payment within a life
insurance policy payable other than due to death (e.g., maturity, expiry, or on demand) would appear to be ʺproceedsʺ and (partially) taxable
CANADA’S LEGAL AND TAX FRAMEWORK (8) Is a CI provision part of the life policy?
For insurance law purposes, Quebec assigns the
policy’s dominant character to all parts of the policy
- Civil Code, art. 2394 It is not clear that this alters the taxability of CI benefits
CANADA’S LEGAL AND TAX FRAMEWORK (9) Is a CI provision part of the life policy?
For insurance law purposes, the common law may prevent mixing of life and A&S elements, effectively requiring (or deeming) two separate policies
This may be the optimal tax result, but it raises questions about ROP treatment on A&S
CANADA’S LEGAL AND TAX FRAMEWORK (10) How do you know what the ʺdominant
characterʺ of the policy is?
– Consider a policy that provides a $1,000,000 payment on the first of CI or death, and no additional benefit thereafter
• What class applies?
CANADA’S LEGAL AND TAX FRAMEWORK (11) Capital Benefits
Optional payment from the Accumulating
Fund/Cash Value of a life insurance policy due to CI/disability/first death on a ʺjoint last-to-dieʺ
contract
– What triggers the payment – the ʺeventʺ or a request for payment?
CANADA’S LEGAL AND TAX FRAMEWORK (12) Where is Ottawa heading? What triggers the payment – the ʺeventʺ or a request?
– CI/LTC could be permissible as non-taxable benefits in a LIP
– Reduced(?) ROP may be non-taxable, with excess amounts treated as ordinary income
– Imposition of tax on savings within A&S?
Taxpayer Deposits
Investments Critical Illness Insurance
Long Term Care Insurance
Registered Health Care Plan
Eligible Medical Expense (1)
Deposit/
Proceeds (2) Premium/ Benefit (2)
(4)
“Misuse” Penalty Traditional
A&S Ins
(1) Tax deductible. Annual maximum amount, possibly age related (2) Not taxable
(3) Fully Taxable
(4) Tax Creditable (to offset tax on withdrawal)
(5) V% of withdrawals if not used for medical expenses
Taxpayer Deposits
Government Grant
Investments Critical Illness Insurance
Long Term Care Insurance
Registered Health Care Plan
Eligible Medical Expense (1) (2) (3) Deposit/ Proceeds (3) Premium /Benefit (3) (5) Grant “Misuse” Recapture Penalty Traditional A&S Ins
TAX-INCENTED CI/LTC OPTIONS (2)
(1) From after tax income. Annual maximum amount, possibly age related (2) X% first $Y of taxpayer annual deposit to a maximum of $Z.
(3) Not taxable
(4) Taxable on growth and/or grant component (income account?)
(5) Tax Creditable (based on entire withdrawal if used for medical expenses) (6) V% of grant and/or W% of growth if withdrawal not used
THE LEGAL AND TAX FRAMEWORK Your text – Second level • Third level – Fourth level » Fifth level
