4 May 2006 External T.I. 2005-0160761E5 - Conversion Right - Joint Life Insured

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 paragraph 148(10)(d) of the Income Tax Act would apply to a joint first to die universal life insurance policy, where the insured has a contractual right to convert from joint first to die coverage into joint last to die coverage.

Position:

The facts provided are insufficient to provide an opinion on the application of paragraph 148(10)(d).

Reasons:

Whether or not a disposition occurs is a question of fact, the exercise of the conversion right is only one factor, all the terms of the insurance policy should be reviewed to determine whether the changes are so fundamental as to go to the root of the policy. If the changes were so fundamental as to go to the root of the contract, there would be a disposition of the policy and the acquisition of a new policy.

XXXXXXXXXX 							2005-016076	

May 4, 2006

Dear XXXXXXXXXX:

Re: Exercise of Life Insurance Contractual Right - Joint Life Insured

We are writing in response to your letter dated November 28, 2005, requesting our views on the application of paragraph 148(10)(d) of the Income Tax Act to the exercise of a contractual right in a joint first to die universal life insurance policy. In particular, a clause in the policy permits a conversion of all or part of the insured's joint first to die coverage into joint last to die coverage without providing any additional evidence of insurability. The cost of coverage for the last to die coverage will be based on the ages of the joint insured on the original issue date of the first to die coverage rather than on the date of conversion.

Written confirmation of the tax implications inherent in particular transactions is given by this Directorate only where the transactions are proposed and are the subject matter of an Advance Income Tax Ruling request. Where the particular transactions are completed, the inquiry should be addressed to the relevant Tax Services Office. However, we are prepared to provide the following comments.

General Comments

Paragraph 148(10)(d) provides that a policyholder will not be deemed to have disposed of or acquired an interest in a life insurance policy as a result only of the exercise of any provision of the policy. In order to give meaning to the word "only" it is our view that it is necessary to determine whether the changes that are made to the terms of the policy, including but not limited to the premium structure, are so fundamental as to go to the root of the policy. If this were the result, there would be a disposition of the policy and the acquisition of a new policy. In our view, the factors that you have noted are not sufficient to allow us to conclude that there would not be a disposition of the policy. While they are relevant, we would want the opportunity to consider all of the changes proposed to the policy before expressing a specific opinion on the application of paragraph 148(10)(d).

Yours truly,

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