3 December 2001 External T.I. 2001-0096125 - 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:

Whether or not the substitution of the life insured under a life insurance policy would result in a disposition of the life insurance policy

Position:

A change in the life insured under a policy would likely be a sufficiently material change to result in a surrender of the original policy.

Reasons:

Whether or not there is an actual disposition of a life insurance policy remains a question of fact.

XXXXXXXXXX 							2001-009612

December 3, 2001

Dear XXXXXXXXXX:

Re: Life Insured

This is in reply to your letter of August 7, 2001 wherein you requested clarification with respect to an earlier opinion we issued dated January 26, 2001.

You are asking whether paragraph 148(10)(d) of the Income Tax Act will apply to deem a policyholder not to have disposed of his/her interest in a life insurance policy as a result only of the exercise of a provision which provides that the life insured under the policy can be substituted.

The determination of whether or not a disposition of a life insurance policy has occurred is a question of fact. As indicated in our earlier response if you have a particular policy and policyholder, you may wish to consider obtaining an advance income tax ruling. However, we are prepared to offer the following general comments which may be of assistance.

Paragraph 148(10)(d) of the Income Tax Act provides that a policyholder will be deemed not to have disposed of or acquired an interest in a life insurance policy (other than an annuity contract) as a result only of the exercise of any provision (other than a conversion into an annuity contract) of the policy. Our view is that paragraph 148(10)(d) of the Income Tax Act applies and was intended to apply where the particular provision being exercised is specific rather than general in nature. For example we would argue that paragraph 148(10)(d) of the Income Tax Act does not apply with regard to the exercise of a provision that provides for the renegotiation of any of the terms of a policy or the addition or deletion of terms or conditions at some later date. In our view a provision that simply allows for a substitution of lives which would necessitate other changes such as to the premium structure would likely be sufficiently material so as to result in a surrender of the original policy and the issuance of a new policy.

We do recognize that paragraph 148(10)(d) of the Income Tax Act could be more clearly stated and we have brought this to the attention of the Department of Finance.

Yours truly,

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