2001 Ruling 2001-0090333 - AMENDMENT TO SEGRATED FUND CONTRACT

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:

1. Whether proposed amendment to an existing Segregated Fund contract would be considered a disposition of the Segregated Fund contract for the purposes of subsection 138.1(1) or section 148 of the Act.

2. Whether the exercise of the a right under a Segregated Fund contract to switch from having investment tracked to one class of notional units to another class of notional units in the same fund would result in a disposition of the contract by the policyholder for the purposes of subsection 138.1(1) or section 148 of the Act.

Position:

1. No disposition for tax purposes, based on the facts.

2. No disposition for tax purposes, based on the facts.

Reasons:

1. The proposed amendments to the contract were not considered so fundamental as to go to the root of the contact, such that the existing contract would be considered to have been disposed of.

2. The exercise of the right would be the exercise of a term under the contract the effect of which would not be so fundamental as to go to the root of the contract. The only consequences of exercising the right will be a change in the amount of the management fee and the level of guarantee.

XXXXXXXXXX 						2001-009033 

XXXXXXXXXX, 2001

Dear XXXXXXXXXX:

Re: Advance income tax ruling
XXXXXXXXXX ("Insurer") (XXXXXXXXXX)

This is in reply to your letter of XXXXXXXXXX, in which you request an advance income tax ruling on behalf of the above named taxpayer. We also acknowledge the information provided in subsequent correspondence and during our various telephone conversations in connection with your request (XXXXXXXXXX).

We understand that, to the best of your knowledge and that of the taxpayers involved:

none of the issues involved in the ruling request

(i) is in an earlier return of the taxpayer or a related person,
(ii) is being considered by a tax services office or taxation center in connection with a previously filed tax return of the taxpayer or a related person,
(iii) is under objection by the taxpayer or a related person,
(iv) is before the courts or, if a judgment has been issued, the time limit for appeal to a higher court has not expired, and
(v) is the subject of a ruling previously issued by the Directorate;

Unless otherwise stated, all references to a statute are to the Income Tax Act R.S.C. 1985 (5th Supp.), c.1, as amended, (the "Act") and all terms and conditions used herein that are defined in the Act have the meaning given in such definition unless otherwise indicated

Facts

Our understanding of the facts, proposed transactions and the purpose of the proposed transactions is as follows:

1. In this letter, the following terms have the meanings specified:

a) "75/100 Guarantee" means a Guarantee Option selected by the Owner providing, in respect of Deposits allocated to the Owner's Class B Deposit Year Account (less a proportionate market value reduction for withdrawals and applicable fees), a 75% guarantee on a Class B Deposit Maturity Date or Class B Contract Maturity Date and a 100% guarantee on the death Benefit Date;

b) "100/100 Guarantee" means a Guarantee Option selected by the Owner providing, in respect of Deposits allocated to the Owner's Class A Deposit Year Account (less a proportionate market value reduction for withdrawals and applicable fees), a 100% guarantee on a Class A Deposit Maturity Date or Class B Contract Maturity Date and a 100% guarantee on the death Benefit Date;

c) "Act" means the Income Tax Act, R.S.C. 1985, c.1 (5th Supp.), as amended at the date hereof;

d) "Aggregate Fund Class Value" means, in respect of a Class of a Segregated Fund, the aggregate fair market value of the assets of the Segregated Fund underlying such Fund Class, less (i) the liabilities attributable to that Class, including without limitation, insurance fees related to a particular Guarantee Option and other expenses solely attributable to that Class; and (ii) its proportionate share of all other liabilities of the Fund which are not specific to a particular Class, such proportionate share to be based on the Aggregate Fund Class Value of each Class on the previous Valuation Date;

e) "Benefit Determination Amount" means, in respect of a Class Deposit Year Account, the aggregate of all Deposits allocated to such Class Deposit Year Account as of the first Valuation Date of the Class Deposit Year, and, on any subsequent Valuation Date, means the amount determined in accordance with the following formula:

(A+B)-C

Where: A is the Benefit Determination Amount in respect of such Class Deposit Year Account on the previous Valuation Date;

B is the aggregate of all Deposits allocated to such Class Deposit Year Account since the previous Valuation Date;

C is the aggregate of all amounts each of which is determined in accordance with the following formula in respect of each payment, transfer fee, surrender or other withdrawal or reclassification allocated on a first-in first-out basis to such Class Deposit Year Account since the previous Valuation Date:

A x (D/E)
Where: D is the aggregate market value of the Units allocated to such Class Deposit Year Account that are surrendered to effect the withdrawal or reclassification, such value to be determined for each applicable Class of each Segregated Fund by multiplying the applicable Unit Value of such Class on the subject Valuation Date by the applicable number of Units of such Class withdrawn or reclassified from such Segregated Fund;
and

E is the Class Deposit Year Account value of such Class Deposit Year Account immediately prior to the withdrawal or reclassification.

f) "Class" means a notional sub-account maintained for all of the Units of each Segregated Fund which carry the same Guarantee Option;

g) "Class A Deposit Maturity Benefit" means, an amount determined at the Class A Deposit Maturity Date in respect of a Class A Deposit Year Account, which amount is the greater of:

i) the Class Deposit Year Account Value for the Class A Deposit Year Account on such date; and (ii) 100% of the Benefit Determination Amount in respect of such Class A Deposit Year Account as at such Class Deposit Maturity Date;

h) "Class A Deposit Maturity Date" means the Class Deposit Maturity Date in respect of a Class A Deposit Year Account;

i) "Class A Deposit Year Account" means the Class Deposit Year Account into which Insurer records all Deposits under the Contract of that Owner for which the Owner has selected the 100/100 Guarantee;

j) "Class A Deposit Year Fund Account" means a Class Deposit Year Fund Account into which Insurer records all Deposits allocated from a Class A Deposit Year Account of an Owner to Class A Units of a particular Segregated Fund during a particular Class A Deposit Year;

k) "Class B Deposit Maturity Benefit" means an amount determined at the Class B Deposit Maturity Date in respect of a Class B Deposit Year Account, which amount is the greater of: (i) the Class Deposit Year Account Value for the Class B Deposit Year Account on such date; and (ii) 75% of the Benefit Determination Amount in respect of such Class B Deposit Year Account as at such Class Deposit Maturity Date;

l) "Class B Deposit Maturity Date" means the Class Deposit Maturity Date in respect of a Class B Deposit Year Account;

m) "Class B Deposit Year Account" means the Class Deposit Year Account into which Insurer records all Deposits under the Contract of that Owner for which the Owner has selected the 75/100 Guarantee;

n) "Class B Deposit Year Fund Account" means a Class Deposit Year Fund Account into which Insurer records all Deposits allocated from a Class B Deposit Year Account of an Owner to Class B Units of a particular Segregated Fund during a particular Class B Deposit Year;

o) "Class Deposit Maturity Date" means in respect of a Class Deposit Year Account, the 10th anniversary of the beginning of the Class Deposit Year associated with such Class Deposit Year Account. All Deposits allocated to a specific Class Deposit year Account will be deemed to have the same Class Deposit Maturity Date. The first Class Deposit Maturity Date for each Class is the 10th anniversary of the Initial Class Deposit Date for such Class. If no cash withdrawal is requested by an Owner in respect of the Class Deposit Maturity Benefit on a Class Deposit Maturity date, a new Class Deposit Maturity Date will generally occur on the 10th anniversary of the Class Deposit Maturity Date;

p) "Class Deposit Year" means, in respect of a Class, a year commencing with the Initial Class Deposit Date for such Class and commencing thereafter with each anniversary date of such Initial Class Deposit Date except in the case of a Class Reset win which case Class Deposit Years will commence initially with the Class Resent Date and commence thereafter with each anniversary date of such Class Resent Date:

q) "Class Deposit Year Account" means a notional account established under a Contract into which Deposits allocated to a particular Class during a particular Class Deposit Year are recorded and is a Class A Deposit Year Account or a Class B Deposit Year Account, as the case may be;

r) "Class Deposit Year Account Value" means, at any time, the aggregate market value of all Units of each Class Deposit Year Fund Account in respect of a Class Deposit Year Account under a Contract;

s) "Class Deposit Year Fund Account" means a notional sub-account of a Class Deposit Year Account into which Insurer records all Deposits allocated to a particular Class of a particular Segregated Fund during a particular Class Deposit Year and is a Class A Deposit Year Fund Account or a Class B Deposit Year Fund Account, as the case may be;

t) "Class Reset" means the setting (at the option of the Owner) under a Contract of a single new Class Deposit Maturity Date to replace all existing Class Deposit Maturity Dates for a particular Class;

u) "Class Reset Date" means the Valuation Date on which a new Class Deposit Maturity Date is set to replace all existing Class Deposit Maturity Dates of a particular Class;

v) "Contract" means either (i) an Existing Contract, as amended and restated, or (ii) a New Contract, which in either case is an individual variable annuity contract issued by Insurer and based upon the life of an individual annuitant named by an Owner in accordance with the provisions of the Contract, under which Deposits are allocated to Class A Units or Class B Units of one or more of the Segregated Funds. A Contract may be issued as a non-registered contract, a retirement savings plan ("RSP"), locked-in retirement account or locked in RSP ("LIRA"), retirement income fund ("RIF"), life income fund ("LIF") or locked-in retirement income fund ("LRIF");

w) "Contract Maturity Benefit" means the amount that will be applied on the Contract Maturity Date to provide a life annuity on the life of the annuitant from the Insurer's portfolio of annuities;

x) "Contract Maturity Date" means the date on which the Contract matures, provided the Contract is still in force and the annuitant is still living;

y) "Death Benefit" means the sum payable to the beneficiary (or beneficiaries) where the annuitant dies prior to the Contract Maturity Date;

z) "Death Benefit Date" means the Valuation Date coinciding with or immediately preceding the earlier of: (a) the date Insurer (or an agent on behalf of Insurer) receives written notice of the death of the annuitant; and (b) the Contract Maturity Date;

aa) "Deposit" means the premium or premiums received from an Owner from time to time in respect of a Contract, (after deduction of any applicable sales charges and premium taxes or other governmental levies) and for greater certainty does not include the dollar amount of any transfers between Segregated Funds;

bb) "Deposit Maturity Benefit" means (i) prior to the proposed transactions, the amount determined in respect of a Deposit Year Account on a Deposit Maturity Date, which amount is essentially the greater of: (A) the value of the Deposit Year Account determined as of the Deposit Maturity date; and (B) 100% of the Deposits allocated to that Deposit Year Account (less a market value reduction for withdrawals and applicable fees) and (ii) after the proposed transactions, means a Class A Deposit Maturity Benefit or a Class B Deposit Maturity Benefit;

cc) "Deposit Year" means (i) prior to the proposed transactions: (A) where no Reset has occurred in respect of all Deposits of the Owner, the year that begins on the first deposit made by the Owner and ends one day before the anniversary of such first Deposit, and subsequent Deposit Years begin on the anniversary of such first Deposit and end on the day before the next anniversary of such first Deposit, and (B) when a Resent has occurred in respect of all Deposits of the Owner, the year that begins on the Reset date relating to such Reset and ends the day before the first anniversary of such Reset date, and subsequent Deposit Years on the anniversary of such Reset date and end on the day before the next anniversary of such Reset date, and (ii) after the proposed transactions, means a Class Deposit Year;

dd) "Deposit Year Account" means (i) prior to the proposed transactions, a notional account into which Insurer currently allocates all Deposits of an Owner during a particular twelve month period, and (ii) after the proposed transactions, means a Class Deposit Year Account;

ee) "Deposit Year Account Value" means (i) prior to the proposed transactions, the aggregate market value of the Units of a Deposit Year Fund Account in respect of a Deposit Year Account and (ii) after the proposed transactions, a Class Deposit Year Account Value. The Deposit Year Account Value varies in accordance with fluctuations in the fair market value of the assets of the relevant Segregated Funds;

ff) "Deposit Year Fund Account" means (i) prior to the proposed transactions, a notional sub-account into which Insurer currently records all Deposits allocated to a particular Segregated Fund, (ii) after the proposed transactions, a Class Deposit Year Fund Account;

gg) "Existing Contracts" means certain existing individual variable annuity insurance contracts;

hh) "Guarantee Option" means either the 100/100 Guarantee or the 75/100 Guarantee;

ii) "Initial Class Deposit Date" means, with respect to a particular class: where there have been no prior Deposits to that Class, the Valuation Date coinciding with the effective date of either the first Deposit to that Class or the first reclassification of Units of the other Class as Units of the particular Class, whichever shall occur first; and where all Units of the particular Class have been surrendered or reclassified, the Valuation Date coinciding with the effective date of either the next Deposit to that Class or the next reclassification of Units of the other Class as Units of the particular Class, whichever shall occur first;

jj) "Insurer" means XXXXXXXXXX;

kk) "New Contracts" means the proposed individual variable annuity insurance contracts;

ll) "Original Units" means Units which were held by the Owner under an Existing Contract;

mm) "Owners" means the owners of certain Existing Contracts and New Contracts;

nn) "Segregated Fund" means any segregated fund listed in Schedule "A" to this ruling request which is available for the investment of Deposits under a Contract and "Segregated Funds" mean all the segregated funds listed in Schedule "A";

oo) "XXXXXXXXXX Benefit" means a deposit made on behalf of the Owner, into a particular Segregated Fund designated for such purpose by Insurer, where the Owner has not provided written direction requesting a cash withdrawal in relation to a particular Deposit Maturity Benefit. Payment of such benefit is conditional on the Contract being in force on such Deposit Maturity Date and the annuitant then being alive.

pp) "Unit" means a notional interest in a Class of a Segregated Fund that is one of an unlimited number of units into which such Class is notionally subdivided. The number of Units in any Class includes fractions;

qq) "Unit Value" means, in respect of a Unit of a particular Class at a particular time, the Aggregate Fund Class Value of that Class divided by the number of Units of such Class on the previous Valuation Date; and

rr) "Valuation Date" means each day on which Insurer (or its agent) determines the market value of the assets of a Segregated Fund.

2. Insurer is a federally-incorporated life insurance company that deals with the XXXXXXXXXX Tax Services Office.

3. Each Segregated Fund is a pool of assets that is segregated by Insurer from its other assets pursuant to the Insurance Companies Act (Canada). The assets of the Segregated Fund are owned by the Insurer.

4. Contracts may be purchased by the Owners only through financial advisors who are licensed under applicable laws to sell life insurance and who are authorized by Insurer.

5. In order to comply with certain laws, a Contract must provide for payment at maturity to the Owner of an amount not less than 75% of the deposits paid by the Owner for a benefit payable at maturity.

6. Each Existing Contract provides for a Deposit Maturity Guarantee, a Contract Maturity Guarantee and a Death Guarantee that are essentially determined as follows:

a) the Deposit Maturity Guarantee guarantees 100% of the Deposits allocated to the Deposit Year Account (less a proportionate market value reduction for any withdrawals and applicable fees) on the Deposit Maturity Date;

b) the Contract Maturity Guarantee guarantees 100% of the Deposits allocated to the Deposit Year Account (less a proportionate market value reduction for any withdrawals and applicable fees) on the Contract Maturity Date; and

c) the Death Guarantee guarantees 100% of the Deposits allocated to the Deposit Year Account (less a proportionate market value reduction for any withdrawals and applicable fees) on the Death Benefit Date.

7. Under the Existing Contracts, there is a single Class of Units of each Segregated Fund and a 100/100 Guarantee for all Deposit Year Accounts. Insurance fees in respect of the 100/100 Guarantee are paid by each Segregated Fund. The Owners have no direct claim on or property rights or interest in the Units or any assets of a Segregated Fund.

8. Under the Existing Contract, an Owner may request a cash payment in relation to an applicable Deposit Maturity Benefit determined on a Deposit Maturity Date. If no such request is made, a XXXXXXXXXX Benefit payment will be made in the amount, if any, by which the Benefit Determination Amount in respect of a Deposit Year Account, exceeds the applicable Deposit Year Account Value on the Deposit Maturity Date.

9. The Existing Contracts provide Insurer with the right to unilaterally amend the Existing Contract should a governmental or regulatory authority impose requirements which affect the Contract.

10. Pursuant to new requirements of the Office of the Superintendent of Financial Institutions, the amount of capital which must be held by federally regulated life insurance companies against their liability under segregated fund guarantees, has increased. As a result of the new requirements, the Insurer has (i) increased the amount of insurance fees that must be paid by each Segregated Fund in respect of the 100/100 Guarantee; and (2) sought ways to decrease the impact of the fee increase on Owners.

PROPOSED TRANSACTIONS

Amendment of Existing Contracts

11. In order to provide an alternative for Owners who have realized increases in the amount of insurance fees payable by each Segregated Fund in respect of the 100/100 Guarantee, Insurer proposes to amend the Existing Contracts in order to provide the Owner with the option to choose a 75/100 Guarantee.

12. The proposed amendments to the Existing Contracts will provide the Owner with the option to change at any time the Guarantee Option for all or part of any Deposit allocated to a particular Segregated Fund from the current 100/100 Guarantee to a 75/100 Guarantee (as described in paragraphs 32 to 36 below). The proposed amendments will also provide the Owner with a one-time option to change the Guarantee Option from the current 100/100 Guarantee to a 75/100 Guarantee pursuant to more favourable rules (as described in paragraph 37 below) which will remain in effect until March 15, 2002 at which time it will lapse.

13. All existing Deposits will be recorded in the Owner's Class A Deposit Year Account and all Deposit Year Fund Accounts of the Owner will be renamed as Class A Deposit Year Fund Accounts.

14. The Original Units of each Segregated Fund in which Deposits currently are allocated will be renamed Class A Units. As with the Original Units, the Class A Units are to be used for the purpose of determining the amount of benefits and tracking Deposits of Owners. The Owners will acquire no direct claim on or property rights or interest in the Units of a Class or any assets of a Segregated Fund.

15. You provided that an Owner who elects to maintain the 100/100 Guarantee Option following the amendment of the Existing Contract, will be in the same position visa-vis the returns and benefits under the amended Existing Contract as he or she would have been in if no amendments were made to the Existing Contract.

16. You further provided that the impact on an Owner of an Existing Contract who elects to switch to the 75/100 Guarantee Option will be as follows:

a) the Owner has the potential to realize an increased return compared to what would be realized by maintaining the 100/100 Guarantee Option because the insurance fees charged in respect of the Class B Units of any particular Segregated Fund will be less than that charged in respect of the Class A Units of the same Segregated Fund resulting in a higher net return per unit, and

b) the Owner will be accepting a higher risk of loss in the event the Class B Deposit Year Account Value is less than the Deposits made by the Owner in respect of Class B Funds on Deposit Maturity Dates and Contract Maturity Dates.

17. The notional division of Segregated Funds into Class A and Class B Units is solely for the purpose of allocating costs of the respective guarantee expenses in accordance with the applicable Guarantee Option, as described in paragraph 29 hereof. The assets of the Segregated Fund are not partitioned, notionally or otherwise, between Classes.

18. Where an Existing Owner wishes to make a new Deposit to be allocated to a Segregated Fund and the Owner elects to have the 75/100 Guarantee apply to the new Deposit, the new Deposit will be recorded in the Owner's Class B Deposit Year Account and allocated to Class B Units of the relevant Segregated Fund. An Owner may have more than one Class of Units in the same Segregated Fund.

19. The amended Existing Contract will also provide the Owner with an option to change the Owner's Guarantee Option in respect of all or part of the Deposits allocated to Class B Units of a Segregated Fund from the 75/100 Guarantee to the 100/100 Guarantee (as described in paragraphs 38 to 40 below).

Benefits in Respect of Class Deposit Year Accounts

20. The amended Existing Contract will provide for a Deposit Maturity Benefit, a Contract Maturity Benefit and a Death Benefit in respect of each Class Deposit Year Account.

21. Where a 75/100 Guarantee Option applies to one or more Deposits, the Class Deposit Maturity Benefit, the Contract Maturity Benefit and the Death Benefit in respect of those Deposits will essentially be determined as follows:

(a) the Class B Deposit Maturity Benefit in respect of a Class B Deposit Year Account will be equal to the greater of (i) the Class B Deposit Year Account Value in respect of such Class B Deposit Year Account as at the Class Maturity Date of such Class B Deposit Year Account; and (ii) 75% of the Benefit Determination Amount of such Class B Deposit Year Account as at the Deposit Maturity Date;

(b) the Class B Contract Maturity Benefit in respect of a Class B Deposit Year Account will be equal to the greater of (i) the Class B Deposit Year Account Value determined as of the Valuation Date coinciding with or immediately preceding the Contract Maturity date; and (ii) 75% of the Benefit Determination Amount of such Class B Deposit Year Account as at the Contract Maturity date; and

(c) the Death Benefit in respect of a Class B Deposit Year Account will be equal to the greater of (i) the Class B Deposit Year Account Value determined as of the Death Benefit Date (less all early surrender fees that would otherwise be applicable on a full surrender of such Class B Deposit Year Account at such time); and (ii) 100% of the Benefit Determination Amount of such Class B Deposit Year Account as at the Death Benefit Date.

22. Where a 100/100 Guarantee Option applies to one or more Deposits, the Class Deposit Maturity Benefit, the Contract Maturity Benefit and the Death Benefit in respect of those Deposits will essentially be determined as follows:

(a) the Class A Deposit Maturity Benefit in respect of a Class A Deposit Year Account will be equal to the greater of (i) the Class A Deposit Year Account Value in respect of such Class A Deposit Year Account at the Class Deposit Maturity date; and (ii) 100% of the Benefit Determination Amount of such Class A Deposit Year Account as at the Deposit Maturity Date;

(b) the Class A Contract Maturity Benefit in respect of a Class A Deposit Year Account will be equal to the greater of (i) the Class A Deposit Year Account Value determined as of the Valuation Date coinciding with or immediately preceding the Contract Maturity Date; and (ii) 100% of the Benefit Determination Amount in respect of the Class A Deposit Year Account as at the Contract Maturity Date; and

(c) the Death Benefit in respect of a Class A Deposit Year Account will be equal to the greater of (i) the Class A Deposit Year Account Value determined as of the Death Benefit (less all early surrender fees that would otherwise be applicable on a full surrender of such Class A Deposit Year Account at such time); and (ii) 100% of the Benefit Determination Amount in respect of such Class A Deposit Year Account as at the Death Benefit Date.

23. In no event will any Class Deposit Maturity Benefit, Class Contract Maturity Benefit or Death Benefit be less than 75% of the Benefit Determination Amount calculated without reference to any sales charges, surrender fees and transfer fees.

24. The XXXXXXXXXX Benefit discussed in paragraph 8, will continue to exist under the amended Existing Contract and will be determined on a Class Deposit Year Account basis as follows:

(a) In respect of Class A Deposit Year Accounts, the XXXXXXXXXX Benefit will be the amount, if any, by which the Benefit Determination Amount in respect of a Class A Deposit Year Account, exceeds the Class A Deposit Year Account Value on such Class A Deposit Maturity Date. The XXXXXXXXXX Benefit deposit will be made in respect of Class A Units of the particular Segregated Fund established for this purpose by the Insurer.

(b) In respect of Class B Deposit Year Accounts, the XXXXXXXXXX Benefit will be the amount, if any, by which 75% of the Benefit Determination Amount in respect of a Class B Deposit Year Account, exceeds the Class B Deposit Year Account Value on such Class B Deposit Maturity Date. The XXXXXXXXXX Benefit deposit will be made in respect of Class B Units of the particular Segregated Fund established for this purpose by the Insurer.

New Contracts

25. New Contracts will be made available by Insurer to the public. You provided that there is no difference between the substantive terms and conditions of the New Contracts and the amended Existing Contracts with respect to the treatment of new deposits, assets, charges, transfers and assignments, surrenders, benefits, guarantee options, reclassifications, resets and other substantive terms and conditions. However, the terms in the amended Existing Contracts which only have application to Original Units and Deposits made prior to the amendment of the Existing Contract will not be included in the New Contracts as the terms would have no application. Specifically, the terms in the amended Existing Contract which provide for the reclassification of an Owner's Original Units under the Existing Contract to Class A Units under the amended Existing Contract as described in paragraphs 13 and 14, and the provisions related to the Special One-Time Rules for Original Units as described in paragraph 37 will not be present in the New Contracts.

26. The Deposits of an Owner under a New Contract will be recorded in either a Class B Deposit Year Account or a Class A Deposit Year Account depending on the Guarantee Options selected by the Owners in respect of their Deposits.

27. When an Owner of a New Contract selects a 100/100 Guarantee in respect of a Deposit to be allocated to a Segregated Fund, that Deposit will be notionally allocated to Class A Units of that Segregated Fund.

28. Where an Owner of a New Contract selects a 75/100 Guarantee in respect of a Deposit to be allocated to a Segregated Fund, that Deposit will be notionally allocated to Class B Units of that Segregated Fund.

Allocation of Income and Expenses

29. The insurance fees identified with a particular Guarantee Option represented by a Class of a Segregated Fund and any other guarantee expenses or liabilities specific to the Class will be allocated to that Class. Other expenses and liabilities of a Segregated Fund that are not specific to a particular Class will be shared proportionately between both Classes of the Segregated Fund based on the Aggregate Fund Class Value of each Class on the previous Valuation Date.

30. Due to the impact of different insurance fees and any other class-specific expenses, the Aggregate Fund Class Value of each Class of the same Segregated Fund will be different. However, the Owners of each Class will share proportionately in the allocation of gross investment income (before fees and expenses) earned on the portfolio of investment assets co-mingled in a common segregated fund portfolio managed for the mutual benefit of both Classes.

31. Net income, capital gains, and capital losses will be apportioned between the two Classes of the Segregated Fund on the basis of the Aggregate Fund Class Value of each Class on the previous Valuation Date.

Changing Guarantee Options and Reclassification of Class A Units to Class B Units

32. The Contracts will permit an Owner to elect, at any time, to change the Guarantee Option in respect of some or all Deposits (or parts thereof) allocated to a particular Segregated Fund, provided certain conditions are satisfied. In order to track Deposits and determine benefits under the Contract, where such a change is made, there will be a reclassification of Units of the particular Segregated Fund allocated to the Owner.

33. If all of the Units of a particular Class A Deposit Year Account of the Owner have been reclassified to a Class B Deposit Year Account, such Class A Deposit Year Account will have its balances set at zero and be closed. If only a portion of the Units in respect of a Class A Deposit Year Account are reclassified, the Benefit Determination Amount with respect to such Class A Deposit Year Account will be proportionally reduced based on the market value of the Units reclassified relative to the aggregate market value of all the Units in the Class A Deposit Year Account immediately prior to the reclassification, in the same manner as if such Units had been withdrawn.

34. If there is no Class B Deposit Year Account in effect at the time of the reclassification, a new Class B Deposit Year Account will commence with the Initial Class B Deposit Date being the effective date of the reclassification. The Deposit Maturity Date applicable to such reclassified Units will be the 10th anniversary of the effective date of the reclassification, rather than the Deposit Maturity Date applicable to the Units prior to the reclassification. The Benefit Determination Amount with respect to such new Class B Deposit Year Account will be an amount equal to the reduction in the Class A Benefit Determination Amount. The Class Deposit Year Account Value of the new Class B Deposit Year Account on the Initial Class B Deposit Date will be equal to the aggregate market value of the reclassified Units immediately prior to reclassification.

35. If there is a Class B Deposit Year Account in effect at the time of the reclassification, the reclassified Units will be allocated to the current Class B Deposit Year Account in effect. The Deposit Maturity Date applicable to the reclassified Units will be the same as the Deposit Maturity Date for all other Deposits made to such current Class B Deposit Year Account rather than the Deposit Maturity Date applicable to the Units prior to the reclassification. The Benefit Determination Amount with respect to such Class B Deposit Year Account will be increased by an amount equal to the reduction in the Class A Benefit Determination Amount form the Class A Deposit Year Account from which the Units were reclassified. The Class Deposit Year Account Value of such Class B Deposit Year Account will be increased by the aggregate market value of the reclassified Units immediately prior to reclassification.

36. Although Class B Units having an equal market value to the reclassified Units will be allocated, the number of Class B Units will generally be different from the number of Class A Units prior to the reclassification, because of the impact of class specific expenses on the Aggregate Fund Class Value of each Class of the same Segregated Fund.

Special One-Time Rules for Original Units

37. Owners under Existing Contracts will be afforded the opportunity to reclassify their Class A Units under special rules that will apply for a limited time period. On the first reclassification of such Class A Units the rules set out above for all other reclassifications from Class A Units to Class B Units will apply except as follows:

(a) On a first reclassification of Original Units, if there is no Class B Deposit Year Account(s) in effect at the time of the reclassification, new Class B Deposit Year(s) will be established with first day(s) being the same as the effective initial first day(s) of the Class A Deposit Year(s) from which Units are being reclassified. The Initial Class B Deposit Date from which all other Class B Deposit Years will be measured will be the date of the earliest Class A Deposit Year Account from which Units are being reclassified. The Deposit Maturity Date(s) applicable to the Units prior to reclassification. The Benefit Determination Amount with respect to each such Class B Deposit Year Account will be an amount equal to the reduction in the Class A Benefit Determination amount for the Class A Deposit Year Account from which the Units were reclassified. The Class Deposit Year Account Value of each such Class B Deposit Year Account on the effective date of the reclassification will be equal to the market value immediately prior to reclassification of the reclassified Units allocated to such Account.

(b) If there is a Class B Deposit Year Account in effect at the time of the reclassification, a series of earlier Class B Deposit Years will also be deemed to be in effect, each commencing on earlier anniversaries of the Initial Cass B Deposit Date. The reclassified Units will be deemed to have been acquired with Deposit(s) allocated to Class B Units in Class B Deposit Year Account(s) which will have Deposit Maturity Date(s) in the same respective calendar years as the Class A Deposit Years from which the Units were reclassified. The Deposit Maturity Dates applicable to the reclassified Units will be the 10th anniversary of the first day of such deemed earlier Class B Deposit Year(s). The Benefit Determination Amount with respect to each such Class B Deposit Year Account will be increased by an amount equal to the reduction in the Class A Benefit Determination Amount for the Class A Deposit Year Account from which the Units were reclassified. The Class Deposit Year Account Value of each such Class B Deposit Year Account will be increased by the market value of the reclassified Units immediately prior to the reclassification of the reclassified Units allocated to such account.

Reclassification from Class B Units to Class A Units

38. A reclassification from Class B Units to Class A Units will be treated as a Class Reset of the Class A Units. Only two such reclassifications may occur in any calendar year. If all of the Units from a particular Class B Deposit Year Account are reclassified to Class A Units, such Class B Deposit Year Account will have its balances set at zero and be closed. If a portion of the Units in respect of a particular Class B Deposit Year Account are reclassified, the Benefit Determination Amount with respect to such Account will be proportionally reduced based on the fair market value of the Units reclassified relative to the aggregate market value of all of the Units in the Class B deposit Year Account immediately prior to the reclassification, in the same manner as if such Units had been withdrawn.

39. If there is no Class A Deposit Year Account in existence at the time of the reclassification, the Initial Class A Deposit Date will be deemed to be the effective date of the reclassification and a new Class A Deposit Year Account will be opened as of the effective date of the reclassification. The Deposit Maturity Date applicable to such Class A Deposit Year Account will be the 10th anniversary of the effective date of the reclassification, rather than the Deposit Maturity Date applicable to the Units prior to the reclassification. The Class Deposit Account Value of the new Class A Deposit Year Account and the Benefit Determination Amount with respect to such Class A Deposit Year Account will be an amount equal to the aggregate market value of the Class B Units being reclassified immediately prior to the reclassification.

40. Although Class A Units having an equal market value to the reclassified Units will be allocated, the number of Class A Units will generally be different from the number of B Units allocated prior to the reclassification, because of the impact of class-specific expenses on the Aggregate Fund Class Value of each Class of the same Segregated Fund.

PURPOSE OF THE PROPOSED TRANSACTIONS

41. The primary objective is to provide any Owner with the option of minimizing the impact of the increase in the insurance fees charged to the Segregated Funds by Insurer, with respect to the Owner's particular interests in the Segregated Fund, by switching to a 75/100 Guarantee Option rather than maintaining the Owner's current 100/100 Guarantee Option. The insurance fees in respect of the 75/100 Guarantee Option will still be higher than the insurance fees for the 100/100 Guarantee prior to the regulatory changes. The proposed transactions will also permit Insurer to more effectively market the Segregated Funds to new Owners whose need for guaranteed amounts may change over time.

RULINGS GIVEN

Provided that the preceding statements constitute a complete and accurate disclosure of all the relevant facts, proposed transactions, and purpose of the proposed transactions and provided further that the proposed transactions are carried out as described above, our rulings are as follows:

A. We confirm that the proposed amendments to an Existing Contract, as described above, will not in and of themselves cause an Owner to be considered to have disposed of an interest in a related segregated fund trust for the purposes of subsection 138.1(1) or section 148 of the Act.

B. We confirm that an election by an Owner under a Contract to change the Guarantee Option in respect of some or all of the Deposits allocated to a particular Segregated Fund and the consequential notional reclassification of Units, as described above, will not result in a disposition of the Contract by the Owner for the purposes of subsection 138.1(1) or section 148 of the Act.

The rulings are given subject to the limitations and qualifications set out in Information Circular 70-6R4 dated January 21, 2001 and is binding on the Canada Customs and Revenue Agency provided that the proposed transactions are completed before XXXXXXXXXX.

Yours truly,

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Manager
Financial Institutions Section
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Brach

Schedule "A"
Segregated Funds

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