16 July 1998 External T.I. 9808215 - RCA - INTEREST OF A LIFE INSURANCE POLICY

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.

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the Department.

Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle du ministère.

Principal Issues: Where an RCA has been funded through life insurance policy:

1. Can a former employee assign the RCA trust to the bank as collateral to take advantage of the tax treatment of a loan?

2. What are tax consequences of an RCA holding life insurance?

Position:

1. Possibly; but payments from RCA are taxable to the former employee
2. It depends upon the life insurance contract purchased.

Reasons: Wording of the Act

1. Paragraph 56(1)(x).

2. General information only, insufficient detail provided.

XXXXXXXXXX 5-980821
Fouad Daaboul

Attention: XXXXXXXXXX

July 16, 1998

Dear Sirs:

Re: Retirement Compensation Arrangement (the “RCA”)

This is in reply to your letter received by this Department on March 31, 1998, wherein you asked if a retired employee (“Employee”) who is receiving payments from a RCA which had been funded by a life insurance policy (“LIP”) can assign the RCA trust to a bank as collateral to “take advantage of the tax treatment of the loan”. You also asked whether the LIP and the refundable tax account can grow until the Employee’s death “at which time all proceeds from the RCA trust will be fully taxable”.

Your questions relate to a proposed transaction and a technical interpretation concerning the tax consequences can only be provided in the context of an advance income tax ruling. We may provide, however, the following general comments which are not binding on the Department.

In your scenario we presume a loan is made by a bank to an individual who would direct that payments from the RCA trust be made to the bank to meet the payments on the loan. Any amount received in a year from a RCA trust by the individual or any other person would be income to the individual under paragraph 56(1)(x). Therefore, even if payments from the RCA trust could be made to the bank (i.e. if the bank accepted the arrangement as collateral), the amount would continue to be the income of the taxpayer.

Regarding your second question, the income tax implications to the RCA trust of holding a life insurance policy depend upon the type of insurance contract purchased. Any payments out of the RCA trust would be fully taxable to the taxpayer as discussed above.

Detailed explanations concerning the tax treatment of a RCA can to be found in the Department's publication entitled Retirement Compensation Arrangement Guide, a copy of which is enclosed.

We trust our comments will be of assistance to you.

Yours truly,

Paul Lynch
for Director
Financial Industries Division
Income Tax Rulings
and Interpretations Directorate
Policy and Legislation Branch