7 May 2002 External T.I. 2002-0127465 - GROUP SEGREGATED FUND CONTRACTS

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 section 107.4 of the Act would apply when a group having an interest in a segregated fund contract is divided into two groups, each having an interest in a segregated fund contract, where the original contract and the two new contracts represent interests in the same underlying segregated fund.

Position: It would depend upon how the transaction is structured.

Reasons:

A qualifying disposition may occur in circumstances when the segregated fund is divided as a consequence of a group's division and the requirements of section 107.4 are otherwise satisfied.

CALU - Conference for Advanced Life Underwriting (2002)

Question 1

Partitioning of group non-registered segregated fund contract

Where a corporation sells a division of its business to another company, the new employer may agree to provide essentially the same benefits to the division's staff as did the original employer. If those benefits included benefits under a group segregated fund contract, the new employer could provide similar entitlements by entering into a new group contract with the same life insurer in respect of the same segregated fund with the members of the new group (i.e., the division's employees) having similar interests under the contract to those they held when they were members of the original group.

This type of situation was the subject of Rulings opinion 2000-0038745, dated April 20, 2001. In that opinion, Rulings expressed the view that the employees of the transferred division would be viewed as having disposed of their interest in the original group segregated fund contract as a result of changing group contracts.

Question:

Wouldn't paragraph 107.4(2)(a) apply to this transaction to eliminate any adverse tax implications to the employees as a result of the disposition?

Agency's Response

Section 107.4 provides that a "qualifying disposition" is a disposition resulting from certain transfers of property to a trust. Where a disposition is a qualifying disposition, section 107.4 may provide a rollover in respect of the property transferred to the trust. As a segregated fund is deemed to be a trust for the purposes of the Act, it is our view that a disposition to a segregated fund may be structured so as to constitute a "qualifying disposition".

Rulings opinion 2000-0038745 discussed a hypothetical fact situation in which the certificateholders under a group segregated fund contract were "split off" from the group when the master policyholder under the group contract - their employer - sold a division of its company. Their new employer entered into a new group contract with the life insurer to provide interests in the same segregated fund to those employees.

In that fact situation, there was no transfer of property to a segregated fund. Therefore, section 107.4 did not apply.

The "qualifying disposition" rules in section 107.4 are relatively new (they were added to the Act in 2001 and apply to dispositions that occur after December 23, 1998). The CCRA has had little opportunity to consider their application in specific factual circumstances. In particular, we have yet to consider the potential application of section 107.4 to transactions involving the division of a group that had shared an interest in a group segregated fund contract. We would expect that, in such circumstances, section 107.4 would most likely be relevant where the segregated fund itself is also divided as a consequence of the group's division.

It is difficult for us to speculate how those rules might apply to particular transactions. In particular, it is difficult to anticipate how the "notional trust" model the Act applies to segregated funds would accommodate the additional level of interests in a group policy without having an opportunity to consider the particular interests of the parties to the particular group contracts at issue in a qualifying disposition context.

We are prepared to consider the potential application of section 107.4 to particular rearrangements under a group segregated fund contract and would welcome your submissions in that respect