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:
An insurer mistakenly advised a policyholder that the gain on maturity of the policy in 2001 would be a taxable capital gain. Based on this information, the policyholder elected to receive a lump sum benefit, rather than an annuity. To rectify the situation, the insurer has proposed in 2002 to backdate its documents to reflect the situation that would have ensued had the policyholder elected to receive an annuity in 2001, and to cancel the T5 issued in 2001. The policyholder has asked whether this would be sufficient to reduce the liability for tax that arose on disposition of the policy in 2001.
Position:
The actions proposed by the insurer do not change the policyholder's liability for tax in 2001.
Reasons:
Transactions completed in prior taxation years cannot be recharacterized by backdating documents. Moreover, we do not believe that there is any authority to cancel an information slip that contains correct information.
November 20, 2002
International Tax Directorate Income Tax Rulings
Directorate
Attention: Athan Margaritis Financial Industries Division
R. Maley
957-9226
2002-016550
Proposal to Cancel T5 issued on Maturity of Endowment Policy
This is in reply to your facsimile transmission of September 30, 2002 in which you asked us to review several documents pertaining to the 2001 tax return of XXXXXXXXXX. In this transmission you included copies of letters to the Canada Customs and Revenue Agency (CCRA) from XXXXXXXXXX dated September 2, 2002 and June 6, 2002 as well as a copy of a letter to XXXXXXXXXX from XXXXXXXXXX dated May 29, 2002.
The documents provided are not detailed. Our impression from these documents are that, prior to October 2001, XXXXXXXXXX held an interest in an endowment policy with XXXXXXXXXX. Upon maturity, the company advised XXXXXXXXXX she would realize a taxable capital gain if she elected to receive her benefit as a lump sum. This information was incorrect. Pursuant to section 148 of the Act, realized gains on the disposition of an insurance policy are fully taxed as income, rather than as capital gains.
However, XXXXXXXXXX relied on the incorrect information and received her benefit as a lump sum. She was assessed, for tax purposes, on the entire amount of the gain in accordance with the Act.
As we understand it, XXXXXXXXXX's alternative to receiving a lump sum would have been to annuitize her benefit. The letters indicate that XXXXXXXXXX has proposed to backdate their records so that they reflect the circumstances that would have ensued had XXXXXXXXXX chosen to receive her benefit in the form of an annuity. XXXXXXXXXX then proposes to cancel the T5 it issued to XXXXXXXXXX in respect of the maturity of her policy.
XXXXXXXXXX has asked for the CCRA's confirmation that XXXXXXXXXX's proposal, if accepted, would result in a reduction in her tax liability for the 2001 taxation year. In our view, it would not, as there is no authority under the Act to recharacterize transactions completed in prior taxation years by backdating documents or to cancel correct information that has been reported in prescribed form.
For your information a copy of this memorandum will be severed using the Access to Information Act criteria and placed in the Canada Customs and Revenue Agency's electronic library. A severed copy will also be distributed to the commercial tax publishers for inclusion in their databases. The severing process will remove all material that is not subject to disclosure, including information that could disclose the identity of the taxpayer. Should your client request a copy of this memorandum, they can be provided with the electronic library version, or they may request a copy severed using the Privacy Act criteria, which does not remove client identity. Requests for this latter version should be made by you to Mrs. Jackie Page at (819) 994-2898. A copy will be sent to you for delivery to the client.
F. Lee Workman
Manager
Financial Institutions Section
Financial Industries Division
Income Tax Rulings Directorate
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