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: An employer is the master policyholder under a group segregated fund contract. The employees of that employer are the certificateholders under the group policy. The contract at issue is fully funded by the employees. The employer sells a division of its company. The new employer assumes the position of group policyholder for the employees of that division which requires a new contract to be written. The terms of the new contract may vary slightly e.g., it may provide for a different management fee, from the terms of the original contract. We are asked to confirm that there is no disposition to the employees on the basis that their "notional underlying trust interest" has not changed.
Position : While the facts of any particular transaction would have to be considered, the transaction would likely result in a disposition to the employees of their interest in the original segregated fund contract.
Reasons: Section 54 provides that a disposition includes a transaction or event entitling a taxpayer to proceeds of disposition. The employees are entitled to proceeds of disposition if their property is transferred or extinguished, and they receive or are entitled to consideration for the property. A transaction or event wherein an interest in a segregated fund trust that is an interest in one insurance contract is extinguished and replaced with an interest in a segregated fund trust that is an interest in another insurance contract would appear to be a transaction or event entitling the employees to proceeds of disposition, even where the two insurance policies derive their value from the same segregated fund.
XXXXXXXXXX 2000-003874
R. Maley
April 20, 2001
Dear XXXXXXXXXX:
Re: Segregated Funds - Group Contracts
This is in reply to your letters of July 20, 2000 and January 19, 2001 requesting our views as to the potential tax consequences to the holder of an interest in a group segregated fund contract in circumstances where that holder ceases to hold an interest in the particular group contract but acquires in substitution therefor an interest in another group segregated fund contract that is invested in the same segregated fund with the same life insurance company (LIC).
Your letter of July 20, 2000 set out several examples to illustrate your concern; however, after some discussion (XXXXXXXXXX\Maley), it is agreed that we will limit our comments to the example set out in your letter of January 19, 2001. In that example, the group contract is signed by an employer and fully funded by the employees. The LIC issues individual account numbers to each employee having an interest in the group contract. The employer sells a division of its company. The new employer assumes the position of group policyholder for the employees of that division of the company. The employees' "account numbers" do not change. However, a new contract must be issued to the new employer. The terms of the new group segregated fund contract may vary slightly e.g., it may provide for a different management fee, from the terms of the original contract, but not sufficiently, in your view, to constitute a material variation at law. The LIC provides T3's directly to the employees in respect of income and capital gains of the segregated funds.
It is your view that the employees of the transferred division should not realize any tax consequences as a result of their having disposed of their interest in the original group contract, as they have not disposed of their "notional underlying trust interest" in the particular segregated funds.
The particular circumstances in your letter on which you have asked for our views appears to be a factual situation involving a specific taxpayer. As explained in Information Circular 70-6R4, it is not this Directorate's practice to comment on proposed transactions involving specific taxpayers other than in the form of an advance income tax ruling. Should your situation involve a specific taxpayer and a completed transaction, you should submit all relevant facts and documentation to the appropriate district taxation office for their views. However, we are prepared to offer the following general comments which may be of assistance.
Our opinion is that employees in the situation described above would be viewed as having disposed of an interest in the original life insurance contract as a result of changing group contracts. Under the current scheme of the Act, two distinct types of interests are contemplated for life insurance contracts. First, there is the interest in a contract that is deemed to be an interest in a related segregated fund trust ("the first interest"). Second, there is the remaining interest in the life insurance policy that is not deemed to be an interest in a related segregated fund trust ("the second interest"). The adjusted cost base of the first interest is defined by section 53 of the Act, while subsection 148(3) excludes amounts relevant to the first interest from the adjusted cost base of the second interest. Similarly, our view is that dispositions in respect of the first interest are defined by section 54 of the Act, while dispositions in respect of the second interest are defined in subsection 148(9). Subparagraph 138.1(1)(g)(i) deems amounts transferred by the insurer from non-segregated to segregated funds to be proceeds of disposition for the purposes of computing the adjusted cost base of the policy under section 148.
Section 54 of the Act provides that a disposition of property results from any transaction or event that entitles a taxpayer to proceeds of disposition of the property. Under proposed amendments, section 54 will be repealed, effective after December 23, 1998 and replaced with a new definition in subsection 248(1). The new definition is identical to the old in this respect.
A transaction or event entitling a taxpayer to proceeds of disposition in respect of a property will not result in a disposition of that property for tax purposes if the transaction or event falls within paragraph (e) of the definition "disposition" in section 54. Paragraph (e) excludes transfers of property from the definition "disposition" where the transfer results in a change in the legal ownership of the property but does not result in a change in the beneficial ownership of the property.
The proposed new definition "disposition" in subsection 248(1) provides two exceptions in respect of transactions that do not involve changes in beneficial ownership of property. The first, in paragraph (e) is substantially similar to the existing exception in section 54 and excludes "any transfer of the property as a consequence of which there is no change in the beneficial ownership of the property" except in a few specific circumstances involving transfers to and from trusts. New paragraph (f) also excludes "any transfer of the property as a consequence of which there is no change in the beneficial ownership of the property", where several specific criteria are satisfied.
In our view, neither the exception set out in paragraph (e) to the definition "disposition" in section 54 nor the exceptions set out in either of paragraphs (e) or (f) of the proposed definition "disposition" in subsection 248(1) would apply to exclude the employees' change of contract from those definitions. This is because, in all cases, the exceptions apply only in respect of transactions or events in which a property is transferred and there is no resulting change in the beneficial ownership of that property. In the hypothetical circumstances at issue, however, the concern is that there may be a disposition (but not a transfer) of an interest in one property, an interest in a segregated fund contract, with no change in the beneficial ownership of different property, being the property held by the general segregated fund that was the subject of the segregated fund contract.
That being the case, the question as to whether or not the employees' change of segregated fund contract constitutes a "disposition" of their first interest in the original contract would depend upon whether or not that change can be viewed as entitling the employees to proceeds of disposition for the purposes of section 54. "Proceeds of disposition" is defined by section 54 as including various amounts. There is no exhaustive definition of proceeds of disposition for the purposes of the Act. However, it is relevant whether or not there is a transfer of or extinguishing of a property, and whether the taxpayer has received or is entitled to any consideration for that transfer or extinguishment. The consideration may consist of either cash or other consideration.
While the facts of any particular transaction would have to be considered, it seems to us that a transaction or event wherein an interest in a segregated fund trust that is an interest in one insurance policy is extinguished and replaced with an interest in a segregated fund trust that is an interest in another insurance policy would likely be a transaction or event entitling the employees to proceeds of disposition, even if the two insurance policies derive their value from the same segregated fund. The proceeds of disposition would be the fair market value of the interest in the new contract.
It may be noted that the second interest would also seemed to be disposed of by virtue of the definition "disposition" in subsection 148(9). There would not appear, however, to be any "proceeds of disposition" as defined subsection 148(9) in respect of the disposition of that interest, in the hypothetical situation.
While the foregoing comments are not binding on the Canada Customs and Revenue Agency, we hope that they are if assistance.
Yours truly,
F. Lee Workman
Manager
Financial Institutions
Financial Industries Division
Income Tax Rulings Directorate
Policy and Legislation Branch
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