4 January 2006 External T.I. 2005-0129961E5 - Group Term Life 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: Where an employer self-funds its employees' life insurance benefit through a trust, will the addition of a catastrophe insurance policy ensure that the trust is treated as a Health and Welfare Trust and not as an employee benefit plan?

Position: No.

Reasons: A life insurance plan that is self-funded is not based on a "policy of insurance" and could be considered an employee benefit plan and obtaining a catastrophe insurance policy will not, in and by itself, ensure that the trust is treated as a Health and Welfare Trust.

								2005-012996
XXXXXXXXXX 							Luisa A. Majerus, CA
(613) 832-3488
January 4, 2006

Dear XXXXXXXXXX:

Re: Group Term Life Insurance

This is in reply to your letter dated May 10, 2005, requesting our views on the tax treatment of employer-provided group term life insurance. Specifically, the XXXXXXXXXX (the "University") is considering the option to self-fund its employees' life insurance benefit through a trust. In addition, the University will enter into a contract with an insurer to provide additional life insurance coverage in the event of a catastrophe (the "catastrophe insurance policy"). You have requested our views on whether your obtaining the catastrophe insurance policy will ensure that the trust is treated as a Health and Welfare Trust and not as an employee benefit plan.

Our Comments

The term "employee benefit plan" is defined for income tax purposes in subsection 248(1) of the Income Tax Act (the "Act") to mean an arrangement under which contributions are made by an employer or by any person with whom the employer does not deal at arm's length to another person and under which one or more payments are to be made to or for the benefit of employees or former employees of the employer. This definition also provides for the types of arrangements that would not be considered employee benefit plans. A fund or plan that is a "group term life insurance policy" referred to in subparagraph 6(1)(a)(i) of the Act is specifically excluded from the definition of employee benefit plan.

The term "group term life insurance policy" is defined for income tax purposes in subsection 248(1) of the Act to mean a group life insurance "policy" under which the only amounts payable by the insurer are:

a) Amounts payable on the death or disability of individuals whose lives are insured in respect of, in the course of or because of, their office or employment or former office or employment, and

b) Policy dividends or experience rating refunds.

The term "insurer" is also defined in subsection 248(1) of the Act to mean an insurance corporation or a corporation that carries on an insurance business.

It is the view of the Canada Revenue Agency that a group term life insurance policy must be a "policy of insurance" under which benefits are paid by an insurer and therefore cannot be self-funded. Accordingly, a life insurance plan that is self-funded could be considered an employee benefit plan.

A Health and Welfare Trust that provides benefits under a group term life insurance policy is not an employee benefit plan and is accorded the tax treatment described in Interpretation Bulletin IT-85R2 "Health and Welfare trusts for employees" ("IT-85R2"). However, as noted in paragraph 3 of IT-85R2, health and welfare arrangements that are not based on insurance may be employee benefit plans. Furthermore, where part of a single plan could be regarded as a plan described as a group term life insurance policy and another part as an employee benefit plan or an employee trust, the combined plan will be given employee benefit plan or employee trust treatment in respect of the timing and amounts of both the employer's expense deductions and the employees' receipt of benefits under the plan. However, if contributions, income and disbursements of the part of the plan that is described as a group term life insurance policy are separately identified and accounted for, the tax treatment outlined in IT-85R2 will apply to that part of the plan. A copy of IT-85R2 can be found on our website at www.cra-arc.gc.ca.

Accordingly, where the University self-funds its employees' life insurance benefits through a trust and enters into a contract with an insurer to provide additional insurance in the event of a catastrophe, we are of the view that the catastrophe insurance policy will not, in and by itself, ensure that the trust is treated as a Health and Welfare Trust and may be treated as an employee benefit plan.

We trust these comments are helpful.

Yours truly,

Phil Jolie
Director
Business and Partnerships Division
Income Tax Rulings Directorate
Policy and Planning Branch