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Income Tax Regulations (C.R.C., c. 945)

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Regulations are current to 2022-09-22 and last amended on 2022-06-23. Previous Versions

PART IIIAnnuities and Life Insurance Policies (continued)

Accumulating Funds

  •  (1) For the purposes of this Part and sections 12.2 and 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 the taxpayer’s 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 the taxpayer’s interest

        exceeds

        • (B) the total of

          • (I) the present value at that time of future premiums to be paid under the contract in respect of the taxpayer’s interest, and

          • (II) the amount payable, if any, in respect of a loan outstanding at that time, made under the contract in respect of the taxpayer’s 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 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; and

    • (c) in respect of an exemption test policy,

      • (i) if the particular time is during the exemption test policy’s pay period, the amount determined by the formula

        A × B/C

        where

        A
        is the amount that would be determined under subparagraph (ii) in respect of the exemption test policy
        • (A) if the exemption test policy’s pay period is determined by subparagraph (b)(i) or (ii) of the definition pay period in section 310, on the first policy anniversary that is on or after the day on which the individual whose life is insured would, if the individual survived, attain the age of 105 years, as defined under the terms of the policy, and

        • (B) in any other case, on the exemption test policy’s policy anniversary represented by the adjectival form of the number of years in its pay period,

        B
        is the number of years since the exemption test policy was issued, and
        C
        is the number of years in the exemption test policy’s pay period,
      • (ii) if the particular time is after the exemption test policy’s pay period and before its endowment date, the amount that is the present value at the particular time of the future benefit on death under the exemption test policy, and

      • (iii) if the particular time is on or after the exemption test policy’s endowment date and the relevant life insurance policy is issued after 2016, the amount that is the benefit on death under the exemption test policy at the particular time.

  • (2) For the purposes of subsection (1), when computing the accumulating fund in respect of

    • (a) an interest described in paragraph (1)(a), the amounts determined under clauses (1)(a)(ii)(A) and (B) are to be computed using,

      • (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) an interest described in paragraph (1)(b) in respect of a life insurance policy issued before 2017 or an annuity contract, if 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 is to be used;

    • (c) an exemption test policy issued in respect of a life insurance policy issued before 2017,

      • (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, the particular period over which the amount determined under clause (B) of the description of A in subparagraph 1401(1)(c)(ii) does not extend to the exemption test policy’s endowment date, the weighted arithmetic mean of the interest rates used to determine the amount is to be used for the period that is after the particular period and before that date,

      • (iii) notwithstanding subparagraphs (i) and (ii), no rate of interest used for the purpose of determining the accumulating fund in respect of an exemption test policy issued in respect of the life insurance policy is to be less than

        • (A) if the life insurance policy is issued after April 1985, 4% per annum, and

        • (B) if the life insurance policy is issued before May 1985, 3% per annum, and

      • (iv) each amount of a benefit on death is to be determined net of any portion in respect of the benefit on death of the exemption test policy related to a segregated fund; and

    • (d) an exemption test policy issued in respect of a coverage under a life insurance policy issued after 2016,

      • (i) the rates of interest and mortality used and the age of the individual whose life is insured under the coverage are to be the same as those used in computing amounts under paragraph 1401(1)(c) in respect of the policy, and

      • (ii) each amount of a benefit on death is to be determined net of any portion in respect of the benefit on death of the exemption test policy related to a segregated fund.

  • (3) and (4) [Repealed, 2014, c. 39, s. 82]

  • (5) In this section, any amount determined by reference to section 1401 shall be determined

    • (a) without regard to section 1402; and

    • (b) as if each reference to “policy loan” in section 1401 were read as a reference to “policy loan, as defined in subsection 148(9) of the Act,”.

    • (c) [Repealed, 2014, c. 39, s. 82]

  • [NOTE: Application provisions are not included in the consolidated text
  • see relevant amending Acts and regulations.]
  • SOR/83-865, s. 5
  • SOR/84-948, s. 2
  • SOR/91-290, s. 1
  • SOR/94-686, ss. 3(F), 55(F)
  • SOR/2011-188, s. 10
  • 2014, c. 39, s. 82

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

    • (a) if, determined at the end of the year, the policy was issued before 2017, the amount determined by the formula

      A × (B – C)

      where

      A
      is the probability, computed on the basis of the rates of mortality under the 1969–75 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 an individual who has the same relevant characteristics as the individual whose life is insured will die in the year,
      B
      is the benefit on death in respect of the interest at the end of the year, and
      C
      is the accumulating fund (determined without regard to any amount payable in respect of the policy loan) in respect of the interest at the end of the year or the interest’s cash surrender value at the end of the year, depending on the method regularly followed by the life insurer in computing amounts under this subsection; and
    • (b) if, determined at the end of the year, the policy was issued after 2016, the total of all amounts each of which is an amount determined in respect of a coverage in respect of the interest by the formula

      A × (B – C)

      where

      A
      is the probability, computed on the basis of the rates of mortality determined in accordance with paragraph 1401(4)(b), or on the basis described in subsection (1.2), that an individual whose life is insured under the coverage will die in the year,
      B
      is the benefit on death under the coverage in respect of the interest at the end of the year, and
      C
      is the amount determined by the formula

      D + E

      where

      D
      is the portion, in respect of the coverage in respect of the interest, of the amount that would be the present value, determined for the purposes of section 307, on the last policy anniversary that is on or before the last day of the year, of the fund value of the coverage if the fund value of the coverage were equal to the fund value of the coverage at the end of the year, and
      E
      is the portion, in respect of the coverage in respect of the interest, of the amount that would be determined, on that policy anniversary, for paragraph (a) of the description of C in the definition net premium reserve in subsection 1401(3) in respect of the coverage, if the benefit on death under the coverage, and the fund value of the coverage, on that policy anniversary were equal to the benefit on death under the coverage and the fund value of the coverage, respectively, at the end of the year.
  • (1.1) If premiums for a life insurance policy do not depend directly on smoking or sex classification, the probability referred to in paragraph (1)(a) may be determined using rates of mortality otherwise determined, provided that for each age for the policy, the expected value of the aggregate net cost of pure insurance, calculated using those 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 1969–75 mortality tables of the Canadian Institute of Actuaries published in Volume XVI of the Proceedings of the Canadian Institute of Actuaries.

  • (1.2) If premiums or costs of insurance charges for a coverage under a life insurance policy do not depend directly on smoking or sex classification, the probability referred to in paragraph (1)(b) may be determined using rates of mortality otherwise determined, provided that for each age for the coverage, the expected value of the aggregate net cost of pure insurance, calculated using those rates of mortality, is equal to the expected value of the aggregate net cost of pure insurance, calculated using the rates of mortality that would be calculated under paragraph (1)(b) in respect of the coverage using the mortality tables described in paragraph 1401(4)(b).

  • (2) Subject to subsection (4), for the purposes of this section and of the description of G in the definition adjusted cost basis in subsection 148(9) 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 the taxpayer’s interest in the life annuity contract 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 under the life annuity contract.

  • (3) Subject to subsection (4), for the purposes of this section and of paragraph (c) of the description of L in the definition adjusted cost basis in subsection 148(9) 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 under the life annuity contract 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.

  • [NOTE: Application provisions are not included in the consolidated text
  • see relevant amending Acts and regulations.]
  • SOR/83-865, s. 5
  • SOR/91-290, s. 2
  • SOR/94-415, s. 3
  • SOR/94-686, s. 55(F)
  • SOR/2011-188, s. 11
  • 2014, c. 39, s. 83

Prescribed Premiums and Prescribed Increases

[
  • [NOTE: Application provisions are not included in the consolidated text
  • see relevant amending Acts and regulations.]
  • SOR/2011-188, s. 12(F)
]
  •  (1) For the purposes of this section and section 306, and of subsection 89(2) of the Act, 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, as defined in subsection 138(12) 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, or

      • (ii) interest earned on policy dividends that are held on deposit by the life insurer;

    • (f) redating lapsed policies, if the policy was reinstated not later than 60 days after the end of the calendar year in which the lapse occurred, 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

    • (i) the payment of interest described in paragraph (a) of the definition premium in subsection 148(9) of the Act.

  • (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.

  • (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.

  • (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.

  • [NOTE: Application provisions are not included in the consolidated text
  • see relevant amending Acts and regulations.]
  • SOR/83-865, s. 5
  • SOR/88-165, s. 30(F)
  • SOR/94-686, s. 55(F)
  • SOR/2011-188, s. 13
  • 2013, c. 34, s. 379
 
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