Submitted by narmstrong on Thu, 01/25/2024 - 03:23
a trust distribution of a life insurance policy to a beneficiary treated as being made for FMV consideration equal to the part of the beneficiary’s capital or income interest that is satisfied
A private corporation (Aco) distributes a life insurance policy of which it is the holder and beneficiary and with an adjusted cost basis (ACB),...
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Principal Issues: (1) Whether subsection 106(3) takes precedence over subsection 148(7) where a discretionary trust transfers an interest in a life insurance policy to its corporate beneficiary as payment of a dividend in kind received by the trust? (2) Whether a corporate beneficiary receiving an interest in a life insurance policy from a trust as payment of a dividend in kind received by the trust should be considered as having given a consideration for the interest in the life insurance policy? (3) Whether subsection 107(2) would be applicable if the dividend is paid by the trust by the issuance of a promissory note, which would be settled in kind the following year by the transfer of the life insurance policy to the corporate beneficiary?
Position: (1) None. General comments provided. (2) Yes. (3) No.
Reasons: (1) and (2) There will be a disposition of all or part of the beneficiary’s income interest in favor of the trust when the trust distributes the life insurance policy to its beneficiary in satisfaction of all or part of the beneficiary’s income interest. Determining the FMV of an income interest in a trust at any given time is a question of fact. To the extent that it is determined that at the time of disposition of the life insurance policy, the beneficiary’s income interest under the trust would include the right to enforce payment of an amount by the trust equal to the FMV of the life insurance policy, it could be argued that the consideration given by the beneficiary to the trust for the interest is equal to the FMV of that life insurance policy. In this context, the tax consequences that would arise from the disposition of the policy would be the same whether subsection 106(3) or 148(7) applies. Since it is not clear that such a result is consistent with tax policy, we will bring this issue to the attention of the Department of Finance. (3) A payment in kind to settle a promissory note is not a situation where a distribution of property from a trust is resulting in a disposition of all or part of the beneficiary’s interest in the capital of the trust. This is rather a situation where a debtor repays its debt to its creditor. The transfer of the life insurance policy by the trust in favor of its beneficiary in repayment of the promissory note gives rise to the application of subsection 148(7). The consideration given by the beneficiary to the trust for purposes of clause 148(7)(a)(ii)(B) corresponds to the amount of the debt being settled.
Principal Issues: (1) Whether subsection 106(3) takes precedence over subsection 148(7) where a discretionary trust transfers an interest in a life insurance policy to its corporate beneficiary as payment of a dividend in kind received by the trust? (2) Whether a corporate beneficiary receiving an interest in a life insurance policy from a trust as payment of a dividend in kind received by the trust should be considered as having given a consideration for the interest in the life insurance policy?
Position: (1) None. General comments provided. (2) Yes.
Reasons: (1) and (2) There will be a disposition of all or part of the beneficiary’s income interest in favor of the trust when the trust distributes the life insurance policy to its beneficiary in satisfaction of all or part of the beneficiary’s income interest. Determining the FMV of an income interest in a trust at any given time is a question of fact. To the extent that it is determined that at the time of disposition of the life insurance policy, the beneficiary’s income interest under the trust would include the right to enforce payment of an amount by the trust equal to the FMV of the life insurance policy, it could be argued that the consideration given by the beneficiary to the trust for the interest is equal to the FMV of that life insurance policy. In this context, the tax consequences that would arise from the disposition of the policy would be the same whether subsection 106(3) or 148(7) applies. Since it is not clear that such a result is consistent with tax policy, we will bring this issue to the attention of the Department of Finance.
Principales Questions: Un particulier, titulaire d'un CELIAPP, peut-il faire un retrait admissible s'il fait construire sa maison par un entrepreneur avec qui il est lié par contrat ? Est-ce la même conclusion s'il construit lui-même son habitation et ne confie à des sous-traitants que certains des travaux ? / Whether an individual, holder of a FHSA, may make a qualifying withdrawal if his house is built by a contractor with whom he is bound by contract? Whether the conclusion would be the same if the individual is an owner-builder who only subcontracted some specific work for the construction of his home.
Position Adoptée : Dans le premier cas, probablement oui. Dans le second cas, cela pourrait être possible selon les faits / In the first case, likely yes. In the second case, it could be possible depending on the facts.
Raisons: L'alinéa c) de la définition de "retrait admissible" exige que le particulier ait conclu une convention écrite et que celle-ci vise l'acquisition ou la construction de l'habitation admissible avant le 1er octobre de l’année civile suivante. Cette condition devrait généralement être remplie si le particulier conclut une convention écrite avec un entrepreneur pour que celui-ci construise l'habitation. Il en est de même lorsque seulement une partie des travaux est confiée à des sous-traitants, dans la mesure où il y a des conventions écrites avec ceux-ci démontrant que des travaux suffisamment importants sont entrepris pour qu’il y ait achèvement de la construction dans le délai. / Paragraph (c) of the definition of "qualifying withdrawal” requires that the individual entered into an agreement in writing for the acquisition or construction of the qualifying home before October 1 of the following calendar year. That condition should generally be met when the individual enters into an agreement with a contractor for that person to build the home. The same applies when only parts of the work are subcontracted, as long as there are written agreements with the subcontractors demonstrating that significant work is undertaken to ensure that the construction will be completed within the time limit.
