9 May 2000 External T.I. 2000-0014250 - CALU 2000 - JOINT LAST-TO-DIE POLICIES

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: Two lives are named under a last-to-die life insurance policy. Whether or not the payment to be made to a beneficiary upon the death of the first person to die would be an amount described in paragraph (j) of the definition of "disposition" in subsection 148(9).

Position: No

Reasons: Since there is no mortality risk with respect to the person that is first to die the payment would not be in respect of a person whose life is insured under the policy.

CONFERENCE FOR ADVANCED LIFE UNDERWRITING - MAY 2000

Question 2
Joint last-to-die policies

Two lives may be covered under a last-to-die life insurance policy. Under such a policy the death benefit is to be paid to a beneficiary upon the death of the last of the two lives covered under the policy. However, such a policy may also provide that upon the death of the first person the insurer may pay an amount to the beneficiary which is not to exceed the cash surrender value of the policy. This payment would reduce the cash surrender value of the policy and may also reduce the death benefit ultimately to be paid out to the beneficiary upon the death of the last person.

Will the payment to be made to the beneficiary upon the death of the first person to die under the policy constitute a payment "in consequence of the death of any person whose life was insured under the policy" as provided in paragraph (j) of the definition of "disposition" in subsection 148(9) such that it could be paid out tax-free if the life insurance policy is an exempt policy?

Agency's Response:

We recognize that the words "in consequence of the death of any person whose life was insured under the policy" found in paragraph (j) of the definition of a "disposition" in subsection 148(9) of the Act are very broad and might be interpreted as including the payment which may be made at the time the first person dies. However, it appears that the insurer is not at risk with respect to the amount payable on the death of the first person since the actual death benefit is paid upon the death of the second person and effectively there is no mortality risk assumed by the insurer in respect of any benefit that may be paid on the death of the first of the two lives named under the policy. It appears reasonable to conclude that the only life insured under the policy is that of the person that is last to die. Consequently, the above payment in our view, would not be a payment described in paragraph (j) of the definition of "disposition" in subsection 148(9) of the Act but rather, pending the review of a particular situation, may be considered to be a policy loan or a partial disposition, and an adjustment to the "adjusted cost basis" of the policy would be appropriately made with respect to this policy loan or partial disposition as provided for in section 148 of the Act.

It is our understanding that the Department of Finance is presently reviewing the taxation of life insurance policies including "last-to-die" policies in order to deal with the tax consequences more explicitly.