29 April 2008 Roundtable, 2008-0270431C6 - CALU 2008, Q7, life insurance, transfer to a child

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: Does 148(8) apply when the transfer of an interest in life insurance policy is made to a child who is a minor or an incapable represented by a guardian of property?

Position: Question of law. Generally, yes.

Reasons: The ownership of the interest is transferred to the child.

CALU - Conference for Advanced Life Underwriting (2008)
Question 7

Transfer of a life insurance policy on a child's life to a "Guardian of Property"

In accordance with subsection 148(8) of the Act, where a policyholder transfers his or her interest in a life insurance policy to a child or grandchild of the policyholder and the child or grandchild is the life insured under the policy, the transfer is deemed to have occurred at the adjusted cost basis (ACB) of the policy.

The CRA has previously stated (Document No. 9826715) that where the policy is transferred to a trust of which the child is the beneficiary, the transfer would not be considered a transfer to the child. Therefore the rollover under subsection 148(8) would not be available. The result would be that the transfer would be considered to be a disposition of the policy at its value at the time of transfer and the difference between the proceeds of disposition and the ACB of the policy would be taxable to the transferor if the transfer is subject to subsection 148(7).

At the death of the parent or grandparent, there are circumstances where transfers of policy ownership must be made to a person other than the child or grandchild who is the life insured. Such a transfer to a third party could occur where the life insured is a minor child or is a person who is mentally challenged and incapable of managing property, regardless of age. In such a case, another person may be appointed as a "guardian of property" for the child.

A guardian of property is someone who is appointed to manage the financial affairs of a minor or a person who is a mentally incapable of doing so for himself or herself. People are considered to be mentally incapable of managing property if they cannot understand the relevant information or appreciate what may happen as a result of decisions they make, or do not make, about their finances.

Question:

Will the CRA confirm that the provisions of subsection 148(8) will apply where an individual is appointed as a guardian of property, in accordance with the relevant provincial legislation 1 or requirements?

CRA's Response

Subsection 148(8) of the ITA stipulates that if the interest of a policyholder in a life insurance policy, other than an annuity contract, is transferred to the policyholder's child for no consideration and a child of the policyholder or a child of the transferee is the person whose life is insured under the policy, the interest is deemed to have been disposed of by the policyholder for proceeds of disposition equal to the ACB to the policyholder of the interest immediately before the transfer, and to have been acquired by the person who acquired the interest for a cost equal to those proceeds.

The ownership of an interest in a life insurance policy is a question of law. In order to determine if the interest in the life insurance policy is transferred to a child of the policyholder, we have to rely on the relevant law applicable to the policy. We are, however, prepared to offer the following comments.

For the purpose of subsection 148(8), CRA will generally consider that an interest of a policyholder has been transferred to the policyholder's child if the child becomes the owner of the life insurance interest. Based on our understanding the relevant law applicable in Ontario, the fact that a guardian of property is appointed to manage the financial affairs of a minor or a person who is a mentally incapable of doing so for himself or herself will not affect the ownership of the interest since the guardian of property only act on the incapable person's behalf. The property (the interest in the life insurance policy) is still belonging to the minor or the incapable. In such a case, the interest in the policy would be deemed to have been disposed of by the policyholder for proceeds of disposition equal to the ACB.

Catherine Ayotte, Notaire, M.Fisc.

613-957-9768
April 29, 2008
2008-027043

ENDNOTES

1 Ontario: Substitute Decision Act S.O. 1992, Chapter 30, section 31; 32; 33.2