15 May 2001 External T.I. 2000-0041155 - UK ENDOWMENT 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: Tax treatment of a U.K. endowment policy acquired by a non-resident individual when the individual later immigrates to Canada.

Position: Provided general comments.

Reasons: Unable to provide a definitive response due to insufficient information. When a policy is issued by a non-resident insurer, the required information to determine the tax implications is usually not available.

XXXXXXXXXX 						2000-004115

May 15, 2001

Dear XXXXXXXXXX:

Re: Endowment Policy

This is in reply to your facsimile letter of August 7, 2000 and further to our telephone conversation of August 15, 2000 (Middleton/XXXXXXXXXX). You have requested our views with respect to the income tax treatment of an endowment policy acquired by you prior to immigrating to Canada from the United Kingdom ("U.K.") in 1999.

A request for confirmation of the income tax consequences of completed transactions involving specific taxpayers should be made to the appropriate local Tax Services Office. However, we can offer the following general comments which may be of some assistance.

When an individual immigrates to Canada and becomes a Canadian resident, subsection 128.1(1) of the Income Tax Act (the "Act") generally deems that individual to have disposed of each property owned by him or her immediately before that time for proceeds of disposition equal to the fair market value of the particular property at that time and to have reacquired each such property so disposed of for a cost equal to the amount of the deemed proceeds. The intended effect of these rules is not to tax gains which accrued prior to immigration.

We note that the rules in subsection 128.1(1) of the Act would generally apply to a taxpayer's interest in a life insurance policy that is not a "taxable Canadian property". For the purpose of section 128.1 of the Act, the term "taxable Canadian property" is defined to include an interest in a "life insurance policy in Canada". A "life insurance policy in Canada" is defined in subsection 138(12) of the Act as meaning a life insurance policy issued or effected by an insurer upon the life of a person resident in Canada at the time the policy was issued or effected.

Where subsection 128.1(1) of the Act is applicable, a policyholder will be deemed to have "last acquired" the policy at the time the policyholder became resident in Canada for the purposes of subsection 12.2(1) of the Act. Pursuant to subsection 12.2(1) of the Act, the accrued income under a non-exempt life insurance policy last acquired after 1989 is generally taxed on an annual basis. The amount of the accrual is based on the excess of the policy's "accumulating fund", as defined in section 307 of the Income Tax Regulations each year, over its "adjusted cost basis", as defined in subsection 148(9) of the Act. The accumulating fund is essentially a measure of the accumulating investment growth or build-up over time. The adjusted cost basis is essentially the cost of the policy adjusted for certain items such as premiums paid under the policy and any amount of accrued income previously included in computing the policyholder's income.

In addition, 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 of that interest immediately before the disposition.

As discussed in Interpretation Bulletin IT-87R2, a copy of which is enclosed, the determination of the accumulating fund and the adjusted cost basis of a policy generally requires information that is available only in the accounts of the issuer.

Based on the limited information provided, it appears that your U.K. endowment policy would not constitute a taxable Canadian property since you were not resident in Canada at the time it was issued or effected. Accordingly, the deemed disposition and acquisition rules in subsection 128.1(1) of the Act would apply with the result that the accrued income accumulated in the policy prior to immigration will not be subject to tax in Canada. However, you would be subject to tax annually on the build-up accumulated while resident in Canada to the extent that subsection 12.2(1) of the Act is applicable and on any untaxed gain in the policy when you dispose of the policy pursuant to subsection 148(1) of the Act.

Finally, we would add that the foreign property reporting rules set out in section 233.3 of the Act require a person that owns "specified foreign property", 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. A "specified foreign property" is defined in subsection 233.3(1) of the Act and could include, where applicable, a taxpayer's interest in a foreign life insurance policy.

Our comments are given in accordance with the practice referred to in paragraph 22 of IC 70-6R4 and are not binding on the Agency in respect of any particular situation.

Yours truly,

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

Enclosure