11 April 2000 1999-0006975 - LAST-TO-DIE LIFE INSURANCE POLICY

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: Two lives are covered under a last-to-die life insurance policy. Whether or not the payment to be made to a beneficiary upon the death of the first person to die would be an amount described in paragraph (j) of the definition of "disposition" in subsection 148(9).

Position: No

Reasons: Since there is no mortality risk with respect to the person that is first to die the payment would not be in respect of a person whose life is insured under the policy.

XXXXXXXXXX 1999-000697

Attention: XXXXXXXXXX

April 11, 2000

Dear Sir:

Re: Last-to-die life insurance policy

This is in reply to your letter of September 21, 1999 wherein you requested our views with respect to a last-to-die life insurance policy wherein two individuals are jointly covered under the life insurance policy.

The issue is whether or not the payment to be made to a beneficiary upon the death of the first person to die under the policy would constitute a payment "in consequence of the death of any person whose life was insured under the policy" as provided in paragraph (j) of the definition of a "disposition" in subsection 148(9) of the Income Tax Act ("Act"). If this is the case the payment would be excluded from the definition of a disposition and could be paid out on a tax-free basis if the life insurance policy is an exempt policy. Whether or not a particular life insurance policy would be an exempt policy is a question of fact which can only be determined upon the review of a particular life insurance policy.

You have advised that the death benefit is to be paid to a beneficiary upon the death of the last of two lives covered under the policy; the insurer is at risk with respect to the amount payable upon the death of the last of the two lives covered under the policy; upon the death of the first person the insurer may pay an amount to the beneficiary which is not to exceed the cash surrender value of the policy and that this payment would reduce the cash surrender value of the policy and may also reduce the death benefit ultimately to be paid out to the beneficiary upon the death of the last person.

Written confirmation of the tax implications inherent in particular transactions are given by this Directorate only where the transactions are proposed and are the subject matter of an advance income tax ruling request. Where the particular transactions are completed, the inquiry should be addressed to the relevant Tax Services Office. However, we are prepared to offer the following general comments which may be of assistance.

We recognize that the words "in consequence of the death of any person whose life was insured under the policy" found in paragraph (j) of the definition of a "disposition" in subsection 148(9) of the Act are very broad and might be interpreted as including the payment which may be made at the time the first person dies. However, it appears that the insurer is not at risk with respect to the amount payable on the death of the first person since the actual death benefit is paid upon the death of the last person covered under the policy and there is no mortality risk assumed by the insurer in respect of any benefit that may be paid on the death of the first of the two lives covered under the policy. It appears reasonable to conclude that the only life actually insured under the policy is that of the person that is last to die. Consequently, the above payment would not be a payment described in paragraph (j) of the definition of "disposition" in subsection 148(9) of the Act but rather pending the review of a particular situation may be considered to be a policy loan or a partial disposition and an adjustment to the "adjusted cost basis" of the policy would be appropriately made with respect to this policy loan or partial disposition as provided for in section 148 of the Act.

It is our understanding that the Department of Finance is presently reviewing the taxation of life insurance policies including "last-to-die and "multiple life" policies in order to deal with the tax consequences more explicitly.

The foregoing comments are intended as a general discussion only and, as note above, the income tax consequences will depend on the facts of each particular situation which can only be determined on a case by case basis. Therefore while we hope that our comments are of assistance to you, this opinion is not a ruling and accordingly, it is not binding on Canada Customs Revenue Agency.

Yours truly,

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