2 November 2006 Roundtable, 2006-0174041C6 - Rollover to trust on death

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 subsection 70(6) rollover available if trustee required to pay life insurance premiums.

Position: No.

Reasons: As a result of the duty to pay life insurance premiums, persons other than the surviving spouse or common-law partner may, before the survivor's death, obtain the use of the trust income or capital.

CALU - Conference for Advance Life Underwriting (2006)

Question 4
Life Insurance Policy Held by a Spousal Trust

A trust to be created under the terms of a taxpayer's will is intended to meet the conditions imposed by subsection 70(6) of the Income Tax Act (the "Act"). The terms of the trust would allow the trustee to retain ownership of any life insurance policies acquired as a consequence of the taxpayer's death. Premiums under the life insurance policies would under the terms of the trust be required to be paid from the capital of the trust.

Subsection 70(6) of the Act provides that, if certain conditions are met, a transfer of the taxpayer's capital property following the taxpayer's death to the trust will occur on a tax-deferred basis. One of the conditions imposed by the subsection is that the trust be one under which no person except the spouse or common-law partner of the taxpayer may, before the spouse or common-law partner's death, receive or otherwise obtain the use of any of the income or capital of the trust. This condition is imposed by subparagraph 70(6)(b)(ii) of the Act.

What are the CRA's views on whether the condition imposed by subparagraph 70(6)(b)(ii) will be satisfied given the trust's terms regarding life insurance policies?

Agency's Response:

For purposes of our reply we have assumed that the insurance policy is not an annuity or segregated fund contract and that the policy provides only benefits in respect of pure life insurance (i.e., benefits arising only on the death of the life insured) such that no part of the policy premium payments relates to any benefit other than pure life insurance protection.

Principles of insurance law and trust law both would apply in informing our understanding of the nature of the legal relations involved in the circumstances described in your question. These principles may vary from province to province. Therefore, to provide a detailed reply to your question we would require additional information, including: (1) the applicable provincial law governing the policy and the trust, (2) the nature of the life insurance provided under the policy (e.g., an annuity, segregated fund, or pure life insurance), (3) whether the premiums are fully paid, (4) whether policy beneficiaries have been designated by the owner or named in the contract and, if so, whether the designations are irrevocable, (5) an analysis of whether under the applicable law a trustee can acquire an ownership interest in the policy and, if so, (6) whether the policy beneficiaries are trust beneficiaries.

We are prepared, however, to offer some general comments on the potential income tax consequences in the circumstances you describe.

We have limited our analysis to the application of subparagraph 70(6)(b)(ii) of the Act.

In order for property to be transferred on a tax-deferred ("rollover") basis from a deceased taxpayer to a trust, subparagraph 70(6)(b)(ii) requires that the trust be one under which no person except the surviving spouse or common-law partner ("survivor") of the taxpayer may, before survivor's death, receive or otherwise obtain the use of any of the income or capital of the trust. Our position is that the mere possibility of a person other than the survivor receiving or obtaining, before the survivor's death, use of the trust capital or income is sufficient to disqualify the property transfer from the rollover.

A duty to fund a life insurance policy out of trust capital or trust income would, in our view, be one under which a person may obtain the use of the trust capital or trust income. This is because the premium payment is assumed to maintain, for the period covered by the premium, the rights to receive insurance proceeds. Therefore, the existence of such a trust term would be relevant in determining whether a rollover of property can occur to the trust under paragraph 70(6)(b) of the Act.

In the circumstances contemplated by your question, as a result of the duty to pay insurance premiums out of trust property it would appear that persons other than the survivor may, before the survivor's death, obtain the use of the trust income or capital. Therefore, we are of the view that the trust would not satisfy the conditions of subparagraph 70(6)(b)(ii) of the Act.

As a final comment, whether the trust is one that seeks to satisfy the requirements of paragraph 70(6)(b) of the Act or not, and whether the premiums are paid out of trust income or trust capital, it would appear that the policy beneficiary (including, in the circumstances of the trust being named under the policy to receive the insurance proceeds, the trust's beneficiaries) would have a benefit, from the trust's payment of the policy premiums, resulting in the application of section 105 of the Act.