5 December 2001 External T.I. 2000-005561B - DISPOSITION OF A 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 CCRA.

Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ADRC.

Principal Issues:

1.Can a policyholder claim a capital loss upon the disposition of a life insurance policy?

2. Can section 9 apply with respect to a life insurance policy which has been acquired from the terminally ill?

Position:

1. No
2. Yes

Reasons:

1.A capital loss is not permitted by virtue of subparagraph 39(1)(b)(ii) nor is there any provision in the Income Tax Act permitting a deduction of a loss incurred upon such a disposition by a policyholder of a life insurance policy to which section 148 applies.

2. There is an argument that section 9 and not section 148 applies where a life insurance policy is acquired for the purpose of earning a profit on the disposition thereof.

XXXXXXXXXX 							2000-005561

XXXXXXXXXX, 2001

Dear XXXXXXXXXX:

Re: Life insurance policy

This is in reply to your letter dated October 2, 2000 to our Halifax Tax Services Office ("TSO"). We have been requested by Keith Tower of our Halifax TSO to respond directly to you. We apologize for the delay replying to your query.

We cannot provide a specific response to the particular circumstance in your letter which appears to relate to a specific taxpayer and a completed transaction but we are prepared to offer the following general comments which may be of assistance.

Where a policyholder acquires a life insurance policy from an individual who is terminally ill you have enquired as to the treatment for purposes of the Income Tax Act ("Act") of any gain or loss realized or sustained on the subsequent disposition of the policy by the policyholder.

Capital property is defined in section 54 of the Act to mean depreciable property, and any property (other than depreciable property), the gain or loss from the disposition of which would result in a capital gain or capital loss. Pursuant to subparagraphs 39(1)(a)(iii) and (b)(ii) of the Act, a taxpayer holding an interest in a life insurance policy is not able to realize a capital gain or loss on the disposition of a life insurance policy, except to the extent that an interest in a related segregated fund trust which is deemed to have been acquired pursuant to paragraph 138.1(1)(e) of the Act is disposed of.

The disposition of an interest in a life insurance policy by a policyholder is generally subject to the provisions in section 148 of the Act. 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 whose 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. Pursuant to subsection 148(1) of the Act, in circumstances where the disposition of the policy is subject to the provisions of section 148, the excess, if any, of the proceeds of the disposition over the adjusted cost basis of the policy (i.e. both of those terms are defined in subsection 148(9) of the Act) would be included in the income of the policyholder for income tax purposes by virtue of paragraph 56(1)(j) of the Act. We note, however, that there is no provision in the Income Tax Act permitting a deduction of a loss incurred upon the disposition of a life insurance policy to which section 148 of the Act applies.

While a question of fact the acquisition of a life insurance policy from a person who is terminally ill is generally done with a view to profit. Consequently, the purchase of such a life insurance policy is arguably a business as defined in subsection 248 of the Act. In such circumstances, we are of the view that section 9 of the Act would apply to include the profit from the realization of life insurance proceeds on the death of the life insured under the life insurance policy as business income. Conversely, if a loss had resulted from such an endeavor section 9 of the Act would permit a deduction in respect of such a loss.

We hope that our comments will be of assistance.

Yours truly,

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