Letter to Finance Canada re Transitional Rules for "Exempt" Life PoliciesRelease Date: 06/02/2016 Source: Staff Reference: Ronald Sanderson
June 2, 2016
Re: 2016 Transitional Rules for "Exempt" Life Policies
On behalf of the Canadian Life and Health Insurance Association's (CLHIA) member insurance
companies, I am writing to you seeking a modification to the year-end 2016 transitional rules arising from recent changes to the taxation of policyholders of "exempt" life insurance policies.
The new "exempt test" rules impact key life insurance product design features and pricing, such that, for a significant number of products, a policy designed to comply under the pre-2017 regime is unlikely to comply under the post-2016 regime, and vice versa. Unfortunately, the transition point between the old and new regimes is when a policy is "issued", and this date is not uniquely defined in the relevant sections of the Income Tax Act or Regulations. Due to the reliance of insurers' risk assessment processes on information to be provided by third-parties, neither the applicant nor the insurer can predict when that process will be complete, and consequently which tax regime will apply. Typically, over 20% of policies applied for in any calendar year have not completed the underwriting and contract delivery process by the end of that calendar year, making an "issued before 2017" test somewhat uncertain, and posing the potential for significant disruptions to Canada's life insurance market.
We have been in discussions with your respective staff regarding this matter, thus far without resolution. We are therefore bringing our concern to your attention to encourage release of a comfort letter or technical interpretation to preserve an efficient life insurance marketplace during the transitional period as consumers, advisors and insurers adapt to the new regime. Consistent with our prior recommendations, this comfort letter or technical interpretation would interpret "issued before 2017" for the purposes of section 148 of the Income Tax Act, as well as for section 310 and subsection 1401(3) of the Income Tax Regulations, to include only policies where:
- the application signed by the applicant would be received by the insurer before 2017 with all the information required for the insurer to begin underwriting of the insurance applied for,
- all values relating to that insurance would be determined by reference to an effective date before 2017,
- premiums would be paid from that effective date in or before 2016, and
- the first anniversary of the policy would be in or before 2017.
In addition, in order to eliminate any perceived potential abuse of such a clarifying approach, we would recommend adding a further condition to the comfort letter or technical interpretation that "issued before 2017" would be interpreted to only apply to policies that enter into effect no later than March 31, 2017.
A fuller explanation of the effect of the new regime and the operational and market challenges created by the transitional rules is included in the attached document. We of course stand ready to discuss this matter further at any time.
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