Net Cost of Pure Insurance and Mortality Gains And Losses

Transcription

1 Net Cost of Pure Insurance and Mortality Gains And Losses (1) For the purposes of subparagraph 20(1)(e.2)(ii) and paragraph (a) of the description of L in the definition adjusted cost basis in subsection 148(9) of the Act, the net cost of pure insurance for a year in respect of a taxpayer's interest in a life insurance policy is the product obtained when the probability, computed on the basis of the rates of mortality under the mortality tables of the Canadian Institute of Actuaries published in Volume XVI of the proceedings of the Canadian Institute of Actuaries or on the basis described in subsection (1.1), that a person who has the same relevant characteristics as the person whose life is insured will die in the year is multiplied by the amount by which (a) the benefit on death in respect of the taxpayer's interest at the end of the year exceeds (b) the accumulating fund (determined without regard to any policy loan outstanding) in respect of the taxpayer's interest in the policy at the end of the year or the cash surrender value of such interest at the end of the year, depending on the method regularly followed by the life insurer in computing net cost of pure insurance. Related Matter (1.1) Where premiums for a particular class of life insurance policy offered by a life insurer do not depend directly on smoking or sex classification, the probability referred to in subsection (1) may be determined using rates of mortality otherwise determined provided that for each age for such class of life insurance policy, the expected value of the aggregate net cost of pure insurance, calculated using such rates of mortality, is equal to the expected value of the aggregate net cost of pure insurance, calculated using the rates of mortality under the mortality tables of the Canadian Institute of Actuaries published in Volume XVI of the Proceedings of the Canadian Institute of Actuaries.

2 (2) Subject to subsection (4), for the purposes of this section and subparagraph 148(9)(a)(v.1) [subsection 148(9) adjusted cost basis, item G] of the Act, a mortality gain immediately before the end of any calendar year after 1982 in respect of a taxpayer's interest in a life annuity contract means such reasonable amount in respect of his interest therein at that time that the life insurer determines to be the increase to the accumulating fund in respect of the interest that occurred during that year as a consequence of the survival to the end of the year of one or more of the annuitants thereunder. (3) Subject to subsection (4), for the purposes of this section and subparagraph 148(9)(a)(xi) [subsection 148(9) adjusted cost basis, item L(c)] of the Act, a mortality loss immediately before a particular time after 1982 in respect of an interest in a life annuity contract disposed of immediately after that particular time as a consequence of the death of an annuitant thereunder means such reasonable amount that the life insurer determines to be the decrease, as a consequence of the death, in the accumulating fund in respect of the interest assuming that, in determining such decrease, the accumulating fund immediately after the death is determined in the manner described in subparagraph 307(1)(b)(i). (4) In determining an amount for a year in respect of an interest in a life annuity contract under subsection (2) or (3), the expected value of the mortality gains in respect of the interest for the year shall be equal to the expected value of the mortality losses in respect of the interest for the year and the mortality rates for the year used in computing those expected values shall be those that would be relevant to the interest and that are specified under such of paragraphs 1403(1)(c), (d) and (e) as are applicable.

3 Interpretation 310. For the purposes of sections 300, 301 and 304 to 309 and this section, amount payable has the meaning assigned by paragraph 138(12)(b.1) [subsection 138(12) amount payable ] of the Act; benefit on death does not include policy dividends or any interest thereon held on deposit by an insurer or any additional amount payable as a result of accidental death; cash surrender value has the meaning assigned by paragraph 148(9)(b) [148(9) cash surrender value ] of the Act; life insurance policy has the meaning assigned by paragraph 138(12)(f) [subsection 138(12) life insurance policy ] of the Act; life insurance policy in Canada has the meaning assigned by paragraph 138(12)(g) [subsection 138(12) life insurance policy in Canada ] of the Act; policy anniversary includes, where a life insurance policy was in existence throughout a calendar year and there would not otherwise be a policy anniversary in the year in respect of the policy, the end of the calendar year; policy loan has the meaning assigned by paragraph 148(9)(e) [subsection 148(9) policy loan ] of the Act;

4 proceeds of the disposition has the meaning assigned by paragraph 148(9)(e.2) [subsection 148(9) proceeds of disposition ] of the Act; tax anniversary date in relation to an annuity contract means the second anniversary date of the contract to occur after October 22, Accumulating Funds 307. (1) For the purposes of this Part and section 12.2, paragraph 56(1)(d.1) and section 148 of the Act, accumulating fund at any particular time means, (a) in respect of a taxpayer's interest in an annuity contract (other than a contract issued by a life insurer), the amount that is the greater of (i) the amount, if any, by which the cash surrender value of his interest at that time exceeds the amount payable, if any, in respect of a loan outstanding at that time made under the contract in respect of the interest, and (ii) the amount, if any, by which (A) the present value at that time of future payments to be made out of the contract in respect of his interest exceeds the aggregate of (B) the present value at that time of future premiums to be paid under the contract in respect of his interest, and (C) the amount payable, if any, in respect of a loan outstanding at that time, made under the contract in respect of his interest; (b) in respect of a taxpayer's interest in a life insurance policy (other than an exemption test policy or an annuity contract to which paragraph (1)(a) applies), the product obtained when, (i) where the policy is not a deposit administration fund policy and the particular time is immediately after the death of any person on whose life the life insurance policy is issued or effected, the aggregate of the maximum amounts that could be determined by the life

5 insurer immediately before the death in respect of the policy under paragraph 1401(1)(c) and subparagraph 1401(1)(d)(i) if the mortality rates used were adjusted to reflect the assumption that the death would occur at the time and in the manner that it did occur, and (ii) in any other case, the maximum amount that could be determined at that particular time by the life insurer under paragraph 1401(1)(a), computed as though there were only one deposit administration fund policy, or under paragraph 1401(1)(c), as the case may be, in respect of the policy is multiplied by (iii) the taxpayer's proportionate interest in the policy, assuming for the purposes of this paragraph that the life insurer carried on its life insurance business in Canada, its taxation year ended at the particular time and the policy was a life insurance policy in Canada; and (c) in respect of an exemption test policy, (i) where the policy was issued at least 20 years before the particular time, the amount that would be determined at that particular time by the life insurer under clause 1401(1)(c)(ii)(A) in respect of the policy if the insurer's taxation year ended at that particular time, and (ii) in any other case, the product obtained when the amount that would be determined under subparagraph (i) in respect of the policy on its twentieth policy anniversary is multiplied by the quotient obtained when the number of years since the policy was issued is divided by 20. Related Matter (2) For the purposes of subsection (1), when computing the accumulating fund of an interest described in (a) paragraph (1)(a), the amounts determined under clauses (1)(a)(ii)(A) and (B) shall be computed using,

6 (i) where an interest rate for a period used by the issuer when the contract was issued in determining the terms of the contract was less than any rate so used for a subsequent period, the single rate that would, if it applied for each period, have produced the same terms, and (ii) in any other case, the rates used by the issuer when the contract was issued in determining the terms of the contract; (b) paragraph (1)(b), where an interest rate used for a period by a life insurer in computing the relevant amounts in paragraph 1403(1)(a) or (b) is determined under paragraph 1403(1)(c), (d) or (e), as the case may be, and that rate is less than an interest rate so determined for a subsequent period, the single rate that could, if it applied for each period, have been used in determining the premiums for the policy shall be used; and (c) paragraph (1)(c), (i) the rates of interest and mortality used and the age of the person whose life is insured shall be the same as those used in computing the amounts described in paragraph 1403(1)(a) or (b) in respect of the life insurance policy in respect of which the exemption test policy was issued except that (A) where the life insurance policy is one to which paragraph 1403(1)(e) applies and the amount determined under subparagraph 1401(1)(c)(i) in respect of that policy is greater than the amount determined under subparagraph 1401(1)(c)(ii) in respect thereof, the rates of interest and mortality used may be those used in computing the cash surrender values of that policy, and (B) where an interest rate for a period otherwise determined under this subparagraph in respect of that interest is less than an interest rate so determined for a subsequent period, the single rate that could, if it applied for each period, have been used in determining the premiums for the life insurance policy shall be used, and (ii) notwithstanding subparagraph (i), (A) where the rates referred to in subparagraph (i) do not exist, the minimum guaranteed rates of interest used under the life insurance policy to determine cash surrender values and the rates of mortality under the Commissioners 1958 Standard Ordinary Mortality Table, as published in Volume X of the Transactions of the Society of Actuaries, relevant to the person whose life is insured under the life insurance policy shall be used, or (B) where, in respect of the life insurance policy in respect of which the exemption test policy was issued, the period over which the amount determined under clause 1401(1)(c)(ii)(A) does not extend to the date determined under subparagraph 306(3)(d)(ii), the weighted arithmetic mean of the interest rates used to determine such amount shall be used for the period that is after that period and before that date.

7 (3) Notwithstanding paragraph (2)(c), (a) in the case of a life insurance policy issued after April 30, 1985, no rate of interest used for the purpose of determining the accumulating fund in respect of an exemption test policy issued in respect thereof shall be less than 4 per cent per annum; and (b) in the case of a life insurance policy issued before May 1, 1985, no rate of interest used for the purpose of determining the accumulating fund in respect of an exemption test policy issued in respect thereof shall be less than 3 per cent per annum. (4) For the purposes of paragraph (1)(c), (a) where on the date of issue of an exemption test policy the person whose life is insured has attained the age of 75 years, the references in paragraph (1)(c) to 20 and twentieth shall be read as references to 10 and tenth respectively; and (b) where on the date of issue of an exemption test policy the person whose life is insured has attained the age of 66 years but not the age of 75 years, the references in paragraph (1)(c) to 20 and twentieth shall be read as references to (i) the number obtained when the number of years by which the age of the person whose life is insured exceeds 65 years is subtracted from 20, and (ii) the adjectival form of the number obtained by performing the computation described in subparagraph (i), respectively.

8 (5) In this section, any amount determined by reference to section 1401 shall be determined (a) without regard to section 1402; (b) as if each reference therein to the term policy loan were read as if that term had the meaning assigned by paragraph 148(9)(e) [subsection 148(9) policy loan ] of the Act; and (c) as if clauses 1401(1)(c)(i)(B) and 1401(1)(c)(ii)(C) were read without reference to the expression or the interest thereon that has accrued to the insurer at the end of the year. Life Annuity Contracts 301. (1) For the purposes of this Part and section 148 of the Act, life annuity contract means any contract under which a person authorized under the laws of Canada or a province to carry on in Canada an annuities business agrees to make annuity payments to an individual (in this section referred to as the annuitant ) or jointly to two or more individuals (each of whom is referred to as the annuitant in this section), which payments are, by the terms of the contract, (a) to be paid annually or at more frequent periodic intervals; (b) to commence on a specified day; and (c) to continue throughout the lifetime of the annuitant or one or more of the annuitants. Department of Finance Comfort Letters: Active:.

9 (2) For the purposes of subsection (1), a contract shall not fail to be a life annuity contract by reason that (a) the contract provides that the annuity payments may be assigned by the annuitant or owner; (b) the contract provides for annuity payments to be made for a period ending upon the death of the annuitant or for a specified period of not less than 10 years, whichever is the lesser; (c) the contract provides for annuity payments to be made for a specified period or throughout the lifetime of the annuitant, whichever is longer, to the annuitant and thereafter, if the specified period is the longer, to a specified person; (d) the contract provides, in addition to the annuity payments to be made throughout the lifetime of the annuitant, for a payment to be made upon the annuitant's death; (e) the contract provides that the date (i) on which the annuity payments commence, or (ii) on which the contract holder becomes entitled to proceeds of the disposition, may be changed with respect to the whole contract or any portion thereof at the option of the annuitant or owner; or (f) the contract provides that all or a portion of the proceeds payable at any particular time under the contract may be received in the form of an annuity contract other than a life annuity contract. Prescribed Premiums and Prescribed Increases 309. (1)

10 For the purposes of subsections 12.2(9) and 89(2) of the Act, section 306 and this section, a premium at any time under a life insurance policy is a prescribed premium if the total amount of one or more premiums paid at that time under the policy exceeds the amount of premium that, under the policy, was scheduled to be paid at that time and that was fixed and determined on or before December 1, 1982, adjusted for such of the following transactions and events that have occurred after that date in respect of the policy: (a) a change in underwriting class; (b) a change in premium due to a change in frequency of premium payments within a year that does not alter the present value, at the beginning of the year, of the total premiums to be paid under the policy in the year; (c) an addition or deletion of accidental death or guaranteed purchase option benefits or disability benefits that provide for annuity payments or waiver of premiums; (d) a premium adjustment as a result of interest, mortality or expense considerations, or of a change in the benefit on death under the policy relating to an increase in the Consumer Price Index (as published by Statistics Canada under the authority of the Statistics Act) where such adjustment (i) is made by the life insurer on a class basis pursuant to the policy's terms as they read on December 1, 1982, and (ii) is not made as a result of the exercise of a conversion privilege under the policy; (e) a change arising from the provision of an additional benefit on death under a participating life insurance policy (within the meaning assigned by paragraph 138(12)(k) [subsection 138(12) participating life insurance policy ] of the Act) as, on account or in lieu of payment of, or in satisfaction of (i) policy dividends or other distributions of the life insurer's income from its participating life insurance business as determined under section 2402, or (ii) interest earned on policy dividends that are held on deposit by the life insurer; (f) redating lapsed policies within the reinstatement period referred to in subparagraph 148(9)(c)(vi) [subsection 148(9) disposition, paragraph (g] of the Act or redating for policy loan indebtedness; (g) a change in premium due to a correction of erroneous information contained in the application for the policy; (h) payment of a premium after its due date, or payment of a premium no more than 30 days before its due date, as established on or before December 1, 1982; and

11 (i) the payment of an amount described in subparagraph 148(9)(e.1)(i) [subsection 148(9) premium, paragraph (a)] of the Act. S. 309(1) was added by P.C , SOR/83-865, dated November 18, 1983, applicable to taxation years commencing after Related Matter (2) For the purposes of subsections 12.2(9) and 89(2) of the Act, a prescribed increase in a benefit on death under a life insurance policy has occurred at any time where the amount of the benefit on death under the policy at that time exceeds the amount of the benefit on death at that time under the policy that was fixed and determined on or before December 1, 1982, adjusted for such of the following transactions and events that have occurred after that date in respect of the policy: (a) an increase resulting from a change described in paragraph (1)(e); (b) a change as a result of interest, mortality or expense considerations, or an increase in the Consumer Price Index (as published by Statistics Canada under the authority of the Statistics Act) where such change is made by the life insurer on a class basis pursuant to the policy's terms as they read on December 1, 1982; (c) an increase in consequence of the prepayment of premiums (other than prescribed premiums) under the policy where such increase does not exceed the aggregate of the premiums that would otherwise have been paid; (d) an increase in respect of a policy for which (i) the benefit on death was, at December 1, 1982, a specific mathematical function of the policy's cash surrender value or factors including the policy's cash surrender value, and (ii) that function has not changed since that date, unless any part of such increase is attributable to a prescribed premium paid in respect of a policy or to income earned on such a premium; and (e) an increase that is granted by the life insurer on a class basis without consideration and not pursuant to any term of the contract.

12 S. 309(2) was added by P.C , SOR/83-865, dated November 18, 1983, applicable to taxation years commencing after (3) For the purposes of subsections (1) and (2), a life insurance policy that is issued as a result of the exercise of a renewal privilege provided under the terms of another policy as they read on December 1, 1982 shall be deemed to be a continuation of that other policy. S. 309(3) was added by P.C , SOR/83-865, dated November 18, 1983, applicable to taxation years commencing after (4) For the purposes of subsection (2), a life insurance policy that is issued as a result of the exercise of a conversion privilege provided under the terms of another policy as they read on December 1, 1982 shall be deemed to be a continuation of that other policy except that any portion of the policy relating to the portion of the benefit on death, immediately before the conversion, that arose as a consequence of an event occurring after December 1, 1982 and described in paragraph (1)(e) shall be deemed to be a separate life insurance policy issued at the time of the conversion. S. 309(4) was added by P.C , SOR/83-865, dated November 18, 1983, applicable to taxation years commencing after Related Matter Exempt Policies 306.

13 (1) For the purposes of this Part and subsection 12.2(11) of the Act, exempt policy at any time means a life insurance policy (other than an annuity contract or a deposit administration fund policy) in respect of which the following conditions are met at that time: (a) if that time is a policy anniversary of the policy, the accumulating fund of the policy at that time (determined without regard to any policy loan) does not exceed the total of the accumulating funds at that time of the exemption test policies issued at or before that time in respect of the policy; (b) assuming that the terms and conditions of the policy do not change from those in effect on the last policy anniversary of the policy at or before that time and, where necessary, making reasonable assumptions about all other factors (including, in the case of a participating life insurance policy within the meaning assigned by subsection 138(12) of the Act, the assumption that the amounts of dividends paid will be as shown in the dividend scale), it is reasonable to expect that the condition in paragraph (a) will be met on each policy anniversary of the policy on which the policy could remain in force after that time and before the date determined under subparagraph (3)(d)(ii) with respect to the exemption test policies issued in respect of the policy; (c) the condition in paragraph (a) was met on all policy anniversaries of the policy before that time; and (d) the condition in paragraph (b) was met at all times on and after the first policy anniversary of the policy and before that time. S. 306(1) was amended by P.C , SOR/94-415, dated June 2, 1994, applicable: (a) with respect to a life insurance policy issued after March 26, 1992, other than a policy for which written application was made on or before March 26, 1992; and (b) with respect to a life insurance policy amended at any time after March 26, 1992 to increase the amount of the benefit on death. S. 306(1) formerly read: (1) For the purposes of this Part and paragraph 12.2(11)(a) of the Act, exempt policy at any time means a life insurance policy (other than an annuity contract or a deposit administration fund policy)

14 (a) in respect of which (i) on the policy anniversary thereof, if any, occurring at that time, and (ii) assuming that the terms and conditions of the policy do not change from those in effect on the last policy anniversary at or before that time and, where necessary, making reasonable assumptions about all other factors (including, in the case of a participating life insurance policy within the meaning assigned by paragraph 138(12)(k) of the Act, the assumption that the amounts of dividends paid will be as shown in the dividend scale), on each policy anniversary after that time on which the policy could remain in force and before the date determined under subparagraph (3)(d)(ii) with respect to any exemption test policy issued in respect of the policy, the accumulating fund (determined without regard to any policy loan) does not exceed (or, in the case of subparagraph (ii), would not exceed) the aggregate of the accumulating funds of the exemption test policies in respect of the life insurance policy at that time; and (b) that has met the requirements of paragraph (a) on and after the date of its first policy anniversary. S. 306(1) was added by P.C , SOR/83-865, dated November 18, 1983, applicable to taxation years commencing after Related Matter Interpretation Bulletin: Secondary IT-87R2 Policyholders' income from life insurance policies. Tax Window Files: Insurance Policy Acquired From Non-resident Insurer, Technical Interpretation, Financial Industries Division, April 6, 1994, CRA Document No Insurance Contracts Providing Disability Benefits, Technical Interpretation, Financial Industries Division, March 3, 1993, CRA Document No (2) For the purposes of subsection (1), a life insurance policy that is an exempt policy on its first policy anniversary shall be deemed to have been an exempt policy from the time of its issue until that anniversary.

15 S. 306(2) was amended by P.C , SOR/94-415, dated June 2, 1994, applicable: (a) with respect to a life insurance policy issued after March 26, 1992, other than a policy for which written application was made on or before March 26, 1992; and (b) with respect to a life insurance policy amended at any time after March 26, 1992 to increase the amount of the benefit on death. S. 306(2) formerly read: (2) For the purposes of subsection (1), any life insurance policy that meets the requirements of paragraph (1)(a) on its first policy anniversary shall be deemed to have been an exempt policy from the time of its issue until that anniversary. S. 306(2) was added by P.C , SOR/83-865, dated November 18, 1983, applicable to taxation years commencing after (3) For the purposes of this section and section 307, a separate exemption test policy shall be deemed to have been issued to a policyholder in respect of a life insurance policy (a) on the date of issue of the life insurance policy, and (b) on each policy anniversary of the life insurance policy where the amount of the benefit on death thereunder exceeds 108 per cent of the amount of the benefit on death thereunder on the later of the date of its issue and the date of its preceding anniversary, if any, and, for the purpose of determining whether the accumulating fund of the life insurance policy on any particular policy anniversary meets the condition in paragraph (1)(a), each such exemption test policy shall be deemed (c) to have a benefit on death that is uniform throughout the term of the exemption test policy and equal to (i) where the exemption test policy is the first such policy issued in respect of the life insurance policy, the amount on that policy anniversary of the benefit on death of the life insurance policy less the total of all amounts each of which is the amount on that policy anniversary of the benefit on death of another exemption test policy issued on or before that policy anniversary in respect of the life insurance policy, and (ii) in any other case, the amount by which the benefit on death of the life insurance policy on the date the exemption test policy was issued exceeds 108 per cent of the

16 amount of the benefit on death of the life insurance policy on the later of the date of issue of the life insurance policy and the date of its preceding policy anniversary, if any; (d) to pay the amount of its benefit on death on the earlier of (i) the date of death of the person whose life is insured under the life insurance policy, and (ii) the later of (A) ten years after the date of issue of the life insurance policy, and (B) the date that the person whose life is insured would, if he survived, attain the age of 85 years; and (e) to be a life insurance policy in Canada issued by a life insurer that carried on its life insurance business in Canada. S. 306(3), the part following paragraph (b) and before (c)(ii), was amended by P.C , SOR/94-415, dated June 2, 1994 and applicable (a) with respect to a life insurance policy issued after March 26, 1992, other than a policy for which written application was made on or before March 26, 1992; and (b) with respect to a life insurance policy amended at any time after March 26, 1992 to increase the amount of the benefit on death. That part formerly read: and each such exemption test policy shall be deemed (c) to have at any time a benefit on death equal to, (i) where the exemption test policy is the first such policy issued in respect of the life insurance policy, the amount at that time of the benefit on death of the life insurance policy in respect of which it was issued less the aggregate of all amounts each of which is an amount determined under subparagraph (ii) at or before that time, or S. 306(3) was added by P.C , SOR/83-865, dated November 18, 1983, applicable to taxation years commencing after (4)

17 Notwithstanding subsections (1) to (3), (a) where at any particular time the amount of the benefit on death of a life insurance policy is reduced, an amount equal to such reduction (such amount is in this paragraph referred to as the reduction ) shall be applied at that time to reduce the amount of the benefit on death of exemption test policies issued before that time in respect of the life insurance policy (other than the exemption test policy issued in respect thereof pursuant to paragraph (3)(a)), in the order in which the dates of their issuance are proximate to the particular time, by an amount equal to the lesser of (i) the portion, if any, of the reduction not applied to reduce the benefit on death of one or more other such exemption test policies, and (ii) the amount, immediately before that time, of the benefit on death of the relevant exemption test policy; (b) where on the tenth or on any subsequent policy anniversary of a life insurance policy, the accumulating fund thereof (computed without regard to any policy loan then outstanding in respect of the policy) exceeds 250 per cent of the accumulating fund thereof on its third preceding policy anniversary (computed without regard to any policy loan then outstanding in respect of the policy), each exemption test policy deemed by subsection (3) to have been issued before that time in respect of the life insurance policy shall be deemed to have been issued on the later of the date of that third preceding policy anniversary and the date on which it was deemed by subsection (3) to have been issued; and (c) where at one or more times after December 1, 1982 (i) a prescribed premium has been paid by a taxpayer in respect of an interest in a life insurance policy (other than an annuity contract or a deposit administration fund policy) last acquired on or before that date, or (ii) an interest in a life insurance policy (other than an annuity contract or a deposit administration fund policy) issued on or before that date has been acquired by a taxpayer from the person who held the interest continuously since that date, the policy shall be deemed to have been an exempt policy from the date of its issue until the earliest of those times that occurred after December 1, 1982; and (d) a life insurance policy that ceases to be an exempt policy (other than by reason of its conversion into an annuity contract) on a policy anniversary shall be deemed to be an exempt policy on that anniversary (i) if, had that anniversary occurred 60 days after the date on which it did in fact occur, the policy would have been an exempt policy on that later date, or

18 (ii) if the person whose life is insured under the policy dies on that anniversary or within 60 days thereafter. S. 306(4) was added by P.C , SOR/83-865, dated November 18, 1983, applicable to taxation years commencing after 1982.