Update from the 2018 CALU Annual General Meeting

The Conference for Advanced Life Underwriting (CALU) Annual General Meeting held in early May 2018 included a roundtable session with the Canada Revenue Agency (CRA) and the Department of Finance (Finance). We’ll follow up

with more detailed articles to the CRA’s officially published responses. Finance’s responses will not be officially published.

The Canada Revenue Agency’s comments

Until then here’s a summary of the notable responses from the CRA. They confirmed that:

In general, the back-to-back shareholder loan rules (see Shareholder borrowing using corporate assets as security – One issue clarified) will not apply, if corporate-owned collateral is used as security for a personal loan to a shareholder because the lender would not have access to the collateral except if there is a default under the loan (i.e. the collateral is not available to the lender for its own use);

In a split-dollar situation where two parties jointly own a policy that has more than one corporate beneficiary, the CRA would count the entire Adjusted Cost Basis of the policy in calculating each corporate beneficiary’s capital dividend account credit. The CRA followed their prior comments involving a different fact situation (see Capital Dividend Account (CDA) Comments from Canada Revenue Agency). CALU will follow up with Finance on this issue.

The rollover of a policy to a child must be to only one child, but it does not have to be to the child who is insured under the policy.

Finance’s comments

Finance commented on several important issues.

The regulations governing the definition and calculation of the net cost of pure insurance (NCPI) bring about a nil NCPI for the year of death because there is no net amount at risk at the end of the calendar year in which the life insured person dies. This approach limits the NCPI deduction for policies that have been collaterally assigned to secure a loan at death. Finance is not interested in fixing this situation.

In 2013, Leveraged Insured Annuity (LIA) policies became subject to new rules that expunged the tax benefits of these arrangements. Existing LIA policies were grandfathered. Since then, the CRA has said that refinancing an existing loan under a grandfathered LIA policy would affect grandfathering and cause the loss of tax benefits resulting from grandfathering (see The unofficial update from the 2014 CALU CRA and Finance Roundtable). CALU has been working with Finance to secure a comfort letter that would allow existing loans under grandfathered LIA policies to be refinanced without losing grandfathering. Finance said they’re making good progress with CALU and expect to be able to issue a comfort letter. It’s important to wait for this comfort letter before refinancing any existing grandfathered LIA policies.

Finance will not expand the scope of the nil capital gains inclusion rate to include gifts of segregated funds that name a charity as beneficiary. There may be a work around though – making an in-kind-gift of a segregated fund at death is possible by naming a successor annuitant so that the contract continues and that then can be donated to charity.

In response to negative commentary from the CRA regarding life insurance held by life interest trusts (see Life interest trusts and life insurance – Why is there a problem), CALU asked Finance if they would consider making a technical amendment that confirms that under the terms of the trust, a life interest trust can have the right or duty to own and pay premiums on a life insurance policy without disqualifying the trust as a life interest trust. Life interest trusts benefit from a rollover of capital property to the trust and the 21-year rule not being applied until after the death of the life interest beneficiary (There is a deemed disposition on the death of the life interest beneficiary and then every 21 years after that.). Finance expressed the view that paying a premium to maintain life insurance, even if the policy has a cash surrender value, is not the same thing as maintaining income-producing or capital property of a trust. But, Finance also indicated they were open to hearing why paying premiums on a life insurance policy should be considered analogous to maintaining trust property. CALU will prepare a submission on this point.

So, Finance’s responses were a bit of a mixed bag. At least they’re open to change in some areas. Stay tuned for more detailed articles on separate Q&As from CRA and Finance.