3 June 2002 External T.I. 2002-0138595 - LIFE INSURANCE POLICIES T5

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:

A taxpayer disposes of his/her interest in a life insurance policy in a non-arm's length private sale in 1999 without advising the insurer. The insurer is advised only in 2002. Should the insurer report the income on the T5 pursuant to subsection 217(2) of the Regulations for the 1999 or 2002 taxation year?

Position: For the 1999 taxation year

Reasons:

Subsection 217(2) of the Regulations deals with an amount that is required to be included in computing the income of a taxpayer pursuant to paragraph 56(1)(j) which applies with respect to the taxation year in which the disposition occurred. The relevant time for determining the adjusted cost basis and value of the policy is the date of the disposition.

XXXXXXXXXX 					2002-013859

June 3, 2002

Dear XXXXXXXXXX:

Re: Life insurance policies - T5

This is in reply to your letter of May 3, 2002 wherein you requested our views on the interpretation of subsection 217(2) of the Income Tax Regulations (the "Regulations") in a situation where the original owner of a life insurance policy disposed of his/her interest in the policy to another party in a private non-arm's length sale in October 1999. The life insurance company which issued the policy to the original owner was informed in writing of this sale but only in March 2002. You are enquiring as to whether the insurer should prepare a T5 information return to report the amount that is required to be included in computing the original policyholder's income under paragraph 56(1)(j) of the Income Tax Act (the "Act") for the 1999 taxation year or the 2002 taxation year. You are also enquiring as to the timing at which the value and the adjusted cost basis of the policy should be determined, that is either October 1999 or March 2002 for purposes of subsections 148(1), (7) and (9) of the Act.

Our comments below are made on the premise that the insurer would be provided with satisfactory evidence supporting that a disposition has legally occurred in October 1999 as described in your situation.

Pursuant to subsection 148(7) of the Act where an interest in a life insurance policy is disposed of by the policyholder to a person with whom the policyholder is not dealing at arm's length the policyholder is deemed to become entitled to receive proceeds of the disposition equal to the value of the interest at the time of the disposition and the person who acquires the interest by virtue of the disposition is deemed to acquire it at a cost equal to that value. Pursuant to subsection 148(1) of the Act the policyholder is required to include in income the difference between the proceeds of the disposition he/she became entitled to receive in the year and the adjusted cost basis to the policyholder of his/her interest in the policy as determined immediately before the disposition. Paragraph 56(1)(j) of the Act provides that the amount which is required by subsection 148(1) of the Act to be included in the income of the policyholder for the year is to be so included. As a result, in your example, since the disposition occurred in October 1999 the calculation of the adjusted cost basis of the policy, the value of the policy and the amount, if any, which is required to be included in the income of the policyholder would be determined as at the time of the disposition of the policy in the 1999 taxation year.

Subsection 217(2) of the Regulations provides that where the insurer that is the issuer of the policy is either a party to or is notified in writing of, the disposition, the insurer is required to prepare a T5 information return in respect of the amount which is required to be included in the policyholder's income pursuant to paragraph 56(1)(j) of the Act which in your example is to be included in the 1999 taxation year of the policyholder. The insurer would therefore be required to prepare the T5 information return for the 1999 taxation year of the policyholder.

While we hope that our comments will be of assistance to you, they 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 Section
Financial Industries Division
Income Tax Rulings Directorate
Policy and Legislation Branch