7 March 2006 External T.I. 2005-0152041E5 - Foreign Reporting - 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.

Principal Issues: Whether a particular foreign issued investment contract is a life insurance policy and must the investment be reported on the T1135 in connection with the foreign reporting requirements in section 233.2 of the Act.

Position: Cannot determine the nature of the foreign issued investment contract. General comments provided on the $100,000 cost amount test in section 233.3 as well as the provisions of sections 94.1-94.3, 56, 60, 12.2, 138.1 and 148 which may be relevant to the determination of the taxation of income from the foreign issued investment contract.

Reasons: Nature of the contract is a question of fact and law. We do not have all the necessary information to make such a determination.

XXXXXXXXXX 							2005-015204
								Alison Campbell
March 7, 2006

Dear XXXXXXXXXX:

We are writing in reply to your letter of June 29, 2005, which was received by the Income Tax Rulings Directorate on September 23, 2005. In your letter you requested our views on the foreign property reporting requirements in relation to a particular foreign issued investment product.

We are unable to provide you with a definitive reply based on the information submitted however, should your client wish to contact the relevant Taxation Services Office and provide his or her specific policy information, they would be prepared to provide your client with assistance based on his particular factual situation. We can however provide you with the following general comments based on the information provided.

It is unclear to us from the documentation you provided whether the foreign issued investment product acquired by your client is a "life insurance policy", a foreign investment contract or a combination of a "life insurance policy" and a foreign investment contract. While not necessarily conclusive, where a product provides for a death benefit or constitutes an annuity arrangement, it may be suggestive that it could be considered a life insurance policy for the purposes of the Act. If a product does constitute a life insurance policy, it is possible that where there is a specific allocation of assets provided for it, the product would constitute a segregated fund policy to which the rules in section 138.1 of the Income Tax Act (the "Act") apply. Whether any particular contract constitutes a "life insurance policy" is a matter of fact and law and would require among other facts, information as to whether the taxpayer chose the life insurance coverage under the particular contract. Our comments will be based upon the assumption that the contract being considered is a "life insurance policy".

The foreign property reporting rules can be found in section 233.3 of the Act. Subsection 233.3(3)of the Act requires a "reporting entity" to file a return in prescribed form (T1135) by that person's normal tax return filing deadline under Part I of the Act. Subsection 233.3(1) of the Act defines a "reporting entity" to be a "specified Canadian entity" whose total cost amount of "specified foreign property" exceeds $100,000. The term "specified Canadian entity" is defined by exclusion, however, an individual who is resident in Canada will generally be a "specified Canadian entity". A "specified foreign property" is defined in subsection 233.3(1) of the Act. Proposed paragraph 233.3(1)(d.1) of the Act, which if enacted will be applicable to returns for taxation years that begin after 2002, includes in the definition of "specified foreign property", "an interest in an insurance policy that is deemed by subsection 94.2(11) of the Act to be a participating interest in a non-resident entity".

The $100,000 test for the purposes of section 233.3 of the Act, is applied to the "cost amount" of all "specified foreign property" of the taxpayer, computed in the aggregate. Accordingly, where the aggregate of the "cost amount" of all the "specified foreign property" held by a taxpayer exceeds $100,000, the taxpayer will be required to report each "specified foreign property" held by the taxpayer, even though no particular "specified foreign property" has a "cost amount" exceeding $100,000. Subsection 248(1) defines the phrase "cost amount" for purposes of the Act.

With respect to the taxation in Canada of income earned in connection with a life insurance policy, we note that the proposed foreign investment entity ("FIE") rules found in sections 94.1, 94.2, 94.3 and 94.4 of the Act may apply to the taxpayer's interest in the life insurance policy. These rules may apply with respect to any foreign investment held by a Canadian resident individual. As noted above, where proposed subsection 94.2(11) of the Act applies to deem the interest in the life insurance policy to be a participating interest in a non-resident entity, the taxation of income earned in connection with the life insurance policy would be determined with reference to the rules in proposed sections 94.1, 94.2, 94.3 and 94.4 of the Act. Where the "life insurance policy" is not deemed by proposed subsection 94.2(11) of the Act to be a participating interest in a non-resident entity, the life insurance policy will be subject to the ordinary rules for the taxation of life insurance policies under the Act. For the taxation rules applying to life insurance policies, reference should be made to sections 12.2, 56, 60, 138.1 and 148 of the Act. We note that any gain realized from the disposition of a life insurance policy, except to the extent an interest in the life insurance policy is deemed to be an interest in a related segregated fund trust, is precluded from capital gains treatment by virtue of subsection 39(1)(a)(iii) of the Act. As a consequence, gains realized on the disposition of a life insurance policy are generally subject to full taxation. A general explanation of the taxation of participating interests in a non-resident entity and the taxation of life insurance policies under the Act are beyond the scope of this letter.

While our comments are not binding on the Agency in respect of any particular fact situation, we do hope that they will be of assistance to you.

Yours truly,

F. Lee Workman
Manager
Charitable and Financial Institution Sectors
Income Tax Rulings Directorate
Financial Sector and Exempt Entities Division
Legislative Policy and Regulatory Affairs Branch