26 May 2005 Roundtable, 2005-0164711C6 - Conversion rights and paragraph 148(10)(d)

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 the conversion of a life insurance policy issued by one company into a policy issued by another company would constitute a disposition of the policy in circumstances whether there has been a consolidation of the two companies.

Position: See document

Reasons: See document

2005-016471
CLHIA Conference - May 26, 2005
Revised- 13 June 2005

Question 9

Conversion Rights and Paragraph 148(10)(d)

Provincial insurance laws recognize that changing consumer needs and circumstances may necessitate or permit a change in insurance coverage. Where an insurance policy's terms permit such a change, these laws facilitate the conversion of one life insurance policy into another issued by the same company, without new underwriting by the insurer. Under the resultant policy, the insurer is generally prohibited from (a) restricting benefits payable due to suicide and (b) contesting evidence supplied by the applicant and measuring life under the original policy, rights that an insurer normally has with a new policy.

Paragraph 148(10)(d) provides that "a policyholder shall be deemed not to have disposed of or acquired an interest in a life insurance policy (other than an annuity contract) as a result only of the exercise of any provision (other than a conversion into an annuity contract) of the policy".

Based on this provision, it has long been understood by the industry that, subject to the exclusion with respect to annuity contracts, the conversion of a policy into another life insurance policy issued by the same insurer in accordance with the terms of a policy does not result in a disposition of the policy or a change in either the policy's issue date or last acquired date. As a result, the "new" policy is treated as a continuation of the "original" policy in respect of both the determination of the adjusted cost basis under section 148 and exempt room under section 12.2.

Having regard to the consolidation within the life insurance industry in recent years and the various legal forms such consolidations may take, it is increasingly common that the exercise of conversion rights contained within a life insurance policy issued by company A results in a policy issued by company B. That is, the issuer of the "new" policy is not the same company as the issuer of the "original" policy.

For example, suppose that company A issues a term policy convertible to whole life. Company A is then acquired by or combines with company B, in whole or in part. Company B may have assumed all of company A's obligations with respect to the original policy, so that when the policyholder ultimately exercises the conversion right contained in the policy, the result is a policy issued by company B although the original policy was issued by company A. Alternatively, company A might be acquired by company B but remain in existence and the policy may thereafter provide that upon conversion, it becomes a whole life policy issued by company B.

Question

Will the CRA confirm that where all other terms of the original conversion rights are respected, and where the conversion is effected in these circumstances, the conversion will not constitute a disposition of the policy and will not result in a change in the issue date and last acquired date of the policy?

Agency's Response

The CRA confirms that where all other terms of the original conversion rights are respected, and where the conversion is effected in the circumstances described above, the conversion will not constitute a disposition of the policy and will not result in a change in the issue date and last acquired date of the policy.