11 October 2002 External T.I. 2002-0155555 - REPORTING DISPOSITON OF INSURANCE

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 CCRA.

Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ADRC.

Principal Issues:

Interpretation of ITR 217(2) in a situation where the original owner of a life insurance policy disposed of his/her interest in the policy to another party in a private sale.

Position: Applies if the insurer is notified in writing of the transfer

Reasons: Legislation

XXXXXXXXXX 							K.Cooper, LL.B.
								2002-015555
October 11, 2002

Dear XXXXXXXXXX:

This is in reply to your letter of August 2, 2002 wherein you requested our views on the interpretation of subsection 217(2) of the Income Tax Regulations (the "Regulations") in a situation where the original owner of a life insurance policy disposed of his/her interest in the policy to another party in a private sale.

You have advised us that your company requires that most transfers of ownership be documented using a "Transfer of Ownership" form which requests information relating to the relationship between the original and the new owners and the price paid on the transfer. You also indicated that the form provided some guidance as to what constitutes an arm's length relationship. In the situation you have asked us to consider, your company received a form indicating that the two parties to the transfer were not related, that the transfer was at arm's length, and that price paid was less than the cash surrender value of the policy. You have asked whether you have fulfilled your obligations under subsection 217(2) of the Regulations if you have reported the price paid amount as the amount that is required to be included in the income of the original owner pursuant to paragraph 56(1)(j) of the Income Tax Act (the "Act").

The particular circumstances described in your letter appear to be a factual situation involving specific taxpayers. As explained in Information Circular 70-6R5, 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 specific taxpayers and completed transactions, you should submit all relevant facts and documentation to the appropriate Tax Services Office for their views. However, we can offer the following general comments which may be of assistance.

Subsection 217(2) of the Regulations requires an insurer that is the issuer of a life insurance policy to prepare a T5 information return and a T5 slip to report the amount that is required to be included in computing a policyholder's income under paragraph 56(1)(j) of the Act in respect of a disposition of an interest in the policy if the insurer is a party to, or is notified in writing of, the disposition. While in this instance it would appear that the insurer is not a party to the transfer since it is a private sale, the insurer has been notified in writing of the disposition and the requirement in subsection 217(2) of the Regulations does apply.

Paragraph 56(1)(j) of the Act provides that the amount which is required by subsection 148(1) of the Act to be included in the income of the policyholder for the year is to be so included. Pursuant to subsection 148(1) of the Act, the policyholder is required to include in income the difference between the proceeds of disposition he/she became entitled to receive in the year and the adjusted cost basis to the policyholder of his/her interest in the policy as determined immediately before the disposition. The definition of "proceeds of disposition" in subsection 148(9) of the Act provides that the proceeds of disposition of an interest in a life insurance policy is the amount that the policyholder is entitled to receive on the disposition. Pursuant to subsection 148(7) of the Act, where an interest in a life insurance policy is disposed of by the policyholder to a person with whom the policyholder is not dealing at arm's length, the policyholder is deemed to become entitled to receive proceeds of the disposition equal to the value of the interest at the time of the disposition.

In the absence of any further facts to the contrary, it would seem that the appropriate amount to report for the purposes of subsection 217(2) of the Regulations is the amount indicated on the form as the price paid. We note, however, that it is our view that if the insurer has reason to believe that the information provided by the parties to the transfer is false or inaccurate, which may be the case where the price paid is lower than the cash surrender value of the policy and the parties assert that they deal at arm's length or where the information in the policyholder's file suggests that they may not deal at arm's length with the recipient, simply relying on the information on the form provided does not discharge the insurer's responsibilities pursuant to subsection 217(2) of the Regulations and subsections 163(2) or 163.2(2) of the Act.

We hope that our comments will be of assistance.

Yours truly,

F. Lee Workman
Manager
Financial Institutions Section
Financial Industries Division
Income Tax Rulings Directorate
Policy and Legislation Branch