The 2013 Federal Budget took aim at a number of items of concern to the government in terms of unintended tax benefits, including 10/8 life insurance programs.
A 10/8 arrangement involves investing in a life insurance policy with a view to borrowing against that investment for the purpose of creating an annual interest-expense tax deduction for a long period of time (i.e., until the death of an individual whose life is insured under the policy).
Since 2008, the Canada Revenue Agency has publicly expressed its interest in examining and understanding these arrangements. In a sense, the proposed Budget measure may be seen as the government’s legislative response to the lack of success of the CRA on this compliance front.
CRA roundtable, Canadian Tax Foundation Conference – December 2008
During the CRA Roundtable portion of the annual CTF conference, CRA officials commented that the GAAR (General Anti-Avoidance Rule) committee had recently reviewed a 10/8 plan submitted for review. The details of the review were not disclosed, other than to remark that there was a question about interest deductibility.
Initially the industry expectation was that CRA may begin pursuing and challenging such plans under the GAAR. Instead, efforts seem to have been directed toward gathering more information by expanding the scope of insurance company audits.
MNR v RBC Life, 2013 FCA 50
In a series of ex parte motions (ie., moving party alone before the court) in 2009 and 2010, the CRA obtained judicial authorization to require four life insurers to disclose information and documents relating to their respective 10/8 plan holders. Each motion rested on the premise that the “information was required in order to verify that these persons are in compliance with the [Income Tax] Act.”
The desired personal information included names, social insurance numbers, business numbers and trust numbers. The plan and activity requests covered policy numbers, loan amounts, cash surrender values, and interest particulars.
The insurers successfully challenged the orders at the Federal Court. The presiding judge had in fact sat on two of the original ex parte motions. The reasons cast the CRA in an unfavourable light, documenting in detail a failure to make “full and frank disclosure” during the ex parte motions. In particular, the judge was critical of the CRA’s intention to “send a message to the industry” by way of an “audit blitz” to “chill” 10-8 plan business.
CRA appeal to the Federal Court of Appeal, but was denied.
Federal Budget – March 21, 2013
The Budget document referred to the government’s efforts to challenge 10/8 arrangements under existing income tax provisions. However, due to time-consumption and costs, the determination was made to introduce legislative measures to prevent 10/8 arrangements from being used in the future.
As proposed, for taxation years ending on or after March 21, 2013, where one of these policies is pledged as security for borrowing, the following income tax benefits will be denied
- Deductibility of interest
- Deductibility of insurance premiums; an
- Increase in the capital dividend account otherwise occurring on the payment of a death benefit to a private corporation.
- Individuals contemplating or already holding an insurance policy that has or may have a borrowing component should verify with their insurance advisor whether these proposals may apply to them.
- Existing 10/8 holders should consult with their insurance advisor and a tax advisor to consider options.
- Generally, a withdrawal from an insurance policy has tax consequences. The Budget proposes to provide some tax relief for a 10/8 holder who makes a withdrawal in order to repay associated borrowed funds. As proposed, this relief will only be available for withdrawals before Janua
Generally these changes are proposed to apply to payments occurring and periods commencing after 2013.