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:
Would a collateralized loan made by a life insurance company to a terminally ill policyholder, result in a taxable disposition of an interest in the policy?
Position: Generally No.
Reasons:
Provided the loan is made at the discretion of the life insurer and not pursuant to terms and conditions of the life insurance policy, and provided no amendments are made to the life insurance contract to address the collateralized loan, there would not be a disposition of an interest in the policy based on the definition of "disposition" in subsection 148(9).
XXXXXXXXXX 2002-013889
A. Campbell
February 25, 2003
Dear XXXXXXXXXX:
Re: Advance Death Benefits from Life Insurance Policies
This is in reply to your letter dated February 14, 2003 in which you requested our comments on the tax implications resulting from loans made by a life insurance company to a policyholder in certain circumstances. In particular, you would like our confirmation that the advancing of the funds would not be considered a disposition of the existing policy for purposes of section 148 of the Income Tax Act (the "Act") or the acquisition of a new policy.
We understand that the Financial Services Commission of Ontario has adopted a recommendation that life insurance companies should provide funds to terminally ill policyholders who have a life expectancy of less than 24 months. While not legally obligated to provide funding to these policyholders, many life insurers are considering implementing the recommendation by providing loans to the policyholders out of the insurer's general funds. As security for the loan payment received from the life insurer, the policyholder assigns the life insurance policy to the life insurer. Provided there is no amendment made to the life insurance policy, it is our general view that the payment of the loan proceeds by the life insurer would not cause the CCRA to view the life insurance policy to have been disposed of by the individual for purposes of section 148 of the Act and a new life insurance policy to have been issued. However, where such a loan is provided for under the terms and conditions of the life insurance policy, the loan would be a "policy loan" as defined in subsection 148(9) of the Act, and would result in a disposition of an interest in the policy pursuant to paragraph (b) of the definition of "disposition" in subsection 148(9) of the Act.
As we have indicated to you previously, our comments are of a general nature and therefore do not constitute an advance income tax ruling that is binding on the CCRA in respect of a particular situation.
Yours truly,
F. Lee Workman
Manager
Financial Institutions Section
Income Tax Rulings Directorate
Policy and Legislation Branch
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