26 April 1999 External T.I. 9902445 - PERSONAL INVESTMENT PORTFOLIO PLAN

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: Whether or not a personal investment portfolio plan constitutes a life insurance policy for purposes of the Act.

Position: This determination can only be made in the course of a formal review of this product in the context of an advance income tax ruling requested or a review by a TSO.

Reasons: It is a question of law.

XXXXXXXXXX 990244

April 26, 1999

Dear XXXXXXXXXX:

Re: Personal Investment Portfolio Plan

This is in reply to your letter of January 9, 1999 wherein you requested that we provide you with a ruling as to whether or not the above plan constitutes a life insurance policy for purposes of the Income Tax Act (“Act”) in Canada.

The situation you described in your letter appears to relate to either a proposed or completed transaction and we are unable to consider such situations in a general letter of opinion. Should you wish the views of the Department with respect to a completed transaction, you should contact the appropriate local Tax Services Office and provide them with the full particulars of your situation. Alternatively, if the situation presented constitutes a proposed transaction, you may request an advance income tax ruling in accordance with the Department’s requirements as set forth in Information Circular 70-6R3 dated December 30, 1996 a copy of which is attached for your information. You will note in paragraph 5 of this circular that there is a $90.00 fee for each hour or part thereof spent on the ruling request and that an advance payment equal to five hours of work plus GST ($481.50) is required. This prepayment is applied against the amount charged for the advance income tax ruling.

We would like to note that the Department does not make recommendations in respect of tax planning initiatives.

It is not clear that the offshore personal investment portfolio plan referred to in your letter would constitute a life insurance policy for the purposes of the Act. This determination, being a question of law, can only be made in the course of a formal review of this product in the context of an advance income tax ruling request referred to above or a review by a Tax Services Office where the policy has been issued.

However, we can provide you with the following general comments which are not binding on the Department with respect to the taxation in Canada of life insurance products. Our comments are predicated on the individual who is the policyholder of a life insurance policy being considered a resident of Canada for purposes of the Act.

Paragraph 56(1)(j) of the Act requires a taxpayer to include in income the amount determined under subsection 148(1) of the Act. Under subsection 148(1) of the Act, a policyholder is required to include in income in respect of the disposition of an interest in a life insurance policy an amount by which the proceeds of the disposition of the policyholder’s interest in the policy that the policyholder, the beneficiary or assignee is entitled to receive exceeds the policyholder’s “adjusted cost basis”, as defined in subsection 148(9) of the Act, of that interest immediately before the disposition. A “disposition” is defined for the purposes of section 148 of the Act in subsection 148(9) of the Act to include and exclude certain transactions and events. By virtue of paragraph (j) of that definition, a disposition does not include a payment in consequence of the death of any person whole life was insured under an exempt policy or a life insurance policy that was last acquired before December 2, 1982. Therefore, if the life insured under an exempt policy dies, the termination of the policy is not a disposition. Accordingly, subsection 148(1) of the Act would not have application and therefore no amount would be included in the policyholder’s income in respect of the benefit received by the beneficiary.

Where the life insurance policy is not an exempt policy and was acquired after December 1, 1982, the death of the life insured results in a disposition of an interest in the policy immediately before the death by the policyholder pursuant to paragraph 148(2)(b) of the Act. Subparagraph (d)(i) of the definition of “proceeds of the disposition” in subsection 148(9) of the Act deems the policyholder to have received proceeds equal to the “accumulating fund” in respect of the policyholder’s interest in the policy immediately before the time of death. As a result, any accrued income to the date of death is included in the income of the policyholder to the extent that the deemed proceeds exceed the policyholder’s adjusted cost basis.

In addition, section 12.2 of the Act applies to all life insurance policies other than exempt policies as that term is defined in subsection 12.2(11) of the Act in accordance with section 306 of the Income Tax Regulations (“Regulations”). The determination of the “exempt” status of any particular life insurance policy is to be performed “at any time” during which the policy is in effect. We note that it will always be a question of fact to be determined at any particular time whether the policy in question is, or alternatively is not, an “exempt policy” at that time. Consequently, we are not able to provide an opinion or an advance income tax ruling as to the possible “exempt” status of a particular life insurance policy.

A life insurance policy, which may be acquired from a non-resident insurer which is not carrying on an insurance business in Canada, is not specifically precluded from qualifying as an “exempt policy”. It is our view that such a policy could qualify provided the criteria in section 306 of the Regulations were satisfied. While there are no special rules for dealing with this type of situation it would be incumbent on the policyholder to demonstrate that the policy so qualifies. This would include the provision of satisfactory evidence that the life insurance policy satisfied the exempt policy tests in section 306 of the Regulations on the date of the first policy anniversary and continuously thereafter. It is our view 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. If the product referred to in your letter is a life insurance policy it is our view that it would likely constitute a policy that is not an exempt policy.

We also would like to add that foreign property reporting rules have been introduced in the Act pursuant to section 233.3 of the Act which require a person that owns “specified foreign property”, as defined in subsection 233.3(1) of the Act, the total cost of which exceeds $100,000 at any time in the year, to file a prescribed form (T1135) by that person’s normal tax return filing deadline under Part I of the Act. The first reporting date to report foreign investment property over $100,000 is April 1999.

While we trust that the foregoing may be of assistance they are not binding upon the Department.

Yours truly,

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