29 June 2000 External T.I. 2000-0014365 - CALU 2000 - Question 7

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: The CCRA has previously stated that a life insurance policy issued by a non-resident insurer is not precluded from qualifying as an "exempt" policy. However, the information necessary to determine if a life insurance policy is "exempt" may be unavailable to a policyholder. What should a resident taxpayer report with respect to a life insurance policy issued by a life insurer not carrying on a life insurance business in Canada? If the taxpayer reports nothing for Canadian tax purposes, would he or she be subject to any penalties for failure to report income on the policy? If the taxpayer used the services of a tax advisor to prepare his or her T1 return, would the CCRA consider imposing the penalties provided for in the proposed amendments to section 163.2 on the advisor who prepared the return, assuming nothing is reported for Canadian tax purposes with respect to the policy.

Position: If a life insurance policy issued by a non-resident insurer does not constitute an exempt policy to the Canadian taxpayer (or if the taxpayer is otherwise unable to establish whether the policy so qualifies), the income accrual in subsection 12.2(1) must be made. The onus is on the taxpayer to establish that his or her policy is an exempt policy. A failure to include this income would render the taxpayer liable for penalties for the failure to report the income. If a tax advisor were to counsel a taxpayer to not report this income, the advisor would also be liable for penalties, pursuant to proposed section 163.2.

Reasons: The amount that must be included in a taxpayer's income under subsection 12.2(1) must be determined having regard to all the facts. It is the taxpayer's responsibility to determine what is the savings or accumulation component of his or her policy.

Question 7

Life Insurance Policies Issued By Non-Resident Insurers

The Agency has previously stated that "...generally policies issued by insurers not carrying on a life insurance business in Canada will not be able to satisfy the requirements necessary to qualify as exempt policies". The Agency subsequently noted that such a policy "...is not specifically precluded from qualifying as an 'exempt policy'". (Documents Nos. 9917195 and 9923905)

The information necessary to determine if a life insurance policy is "exempt" is generally unavailable to a policyholder. Further, non-resident insurers may not use pricing factors that would enable the appropriate calculations to be made.

Given the foregoing, assume an individual resident in Canada owns a life insurance policy issued by a life insurer not carrying on a life insurance business in Canada.

What should the taxpayer report with respect to this policy on his or her T1 return?

a) If the taxpayer reports nothing for Canadian tax purposes, would he or she be subject to any penalties for failure to report income on the policy?

b) If the taxpayer used the services of a tax advisor to prepare his or her T1 return, would the Agency consider imposing the penalties provided for in the proposed amendments to section 163.2 on the advisor who prepared the return, assuming nothing is reported for Canadian tax purposes with respect to the policy.

Agency's Response:

Subsection 12.2(1) of the Act provides that a taxpayer who holds an interest in a life insurance policy that was last acquired after 1989 must on any anniversary day of the policy include in computing income for the taxation year the amount, if any, by which the accumulating fund on that day in respect of the taxpayer's interest in the policy exceeds the adjusted cost basis to the taxpayer of the interest in the policy on that day. This accrual must be made in respect of all such life insurance policies other than exempt policies, prescribed annuity contracts, and certain contracts under which the taxpayer has received the proceeds in the form of an annuity contract.

The CCRA has previously stated that a life insurance policy issued by a non-resident insurer is not precluded from qualifying as an "exempt" policy for the purposes of this accrual rule. However, the onus is on the taxpayer to establish that his or her policy so qualifies.

If a life insurance policy issued by a non-resident insurer does not constitute an exempt policy to the Canadian taxpayer (or if the taxpayer is otherwise unable to establish whether the policy so qualifies), the income accrual in subsection 12.2(1) must be made. A failure to include this income would render the taxpayer liable for penalties for the failure to report the income. If a tax advisor were to counsel a taxpayer to not report this income, the advisor would also be liable for penalties, pursuant to proposed section 163.2.

The amount that must be included in the taxpayer's income under subsection 12.2(1) must be determined having regard to all the facts. It is the taxpayer's responsibility to determine what is the savings or accumulation component of his or her policy.

The present income tax system is essentially predicated on life insurance policies being issued by insurers that are carrying on business in Canada. Therefore, if a taxpayer should decide to purchase a life insurance policy from an insurer not carrying on business in Canada, it would be prudent to take into account the Canadian tax implications of doing so.