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 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 trust income or capital.
2006 STEP Round Table
Q2. Life Insurance Policies held by a Testamentary Trust
If a testamentary trust is obligated to fund a life insurance policy on the life of the surviving spouse and the trust is the beneficiary of the policy, would this taint the trust and preclude its being a spousal trust pursuant to subsection 70(6) of the Act? If trust income was used to pay the premium, would this cause the trust to fall offside? If trust capital was used to pay the premium, would this cause the trust to fall offside?
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.
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) of the Act 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 duty 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, it would appear that persons other than the survivor may, during the survivor's lifetime and as a result of the duty to pay insurance premiums out of trust property, 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 duty is to pay the premium out of trust income or trust capital, it would appear that the policy beneficiary would have a benefit, from the trust's payment of the policy premium, resulting in the application of section 105 of the Act.
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