1 November 2012 External T.I. 2012-0443171E5 - UK insurance policy

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: Tax treatment of U.K. life insurance policy acquired by non-resident individual who later immigrates to Canada.

Position: General comments provided.

Reasons: The law.

XXXXXXXXXX
2012-044317
W. Doiron

November 1, 2012

Dear XXXXXXXXXX:

Re: Tax treatment of a UK life insurance policy

We are writing in reply to your letter of April 3, 2012, regarding your life insurance policy.

In 1965, you were a resident of the United Kingdom ("UK") and you acquired a life insurance policy. In 1975, you immigrated to Canada and continued to pay the premiums on the policy. The life insurance policy has matured and no income tax was withheld from the payment to you. You are asking whether a Canadian resident is taxable in Canada in respect of funds received upon the maturation of a life insurance policy originating in the UK.

The particular situation outlined in your letter appears to relate to a factual one, involving a specific taxpayer. 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 submitted in the manner set out in Information Circular 70-6R5, Advance Income Tax Rulings, dated May 17, 2002. Where the particular transactions are completed, the inquiry should be addressed to the relevant tax services office. We are, however, prepared to offer the following general comments, which may be of assistance.

Our Comments

It is a question of fact whether the policy in question is considered a life insurance policy under the Income Tax Act (the "Act"). The term "life insurance policy" is broadly defined in subsection 138(12) of the Act. However, based on the limited information provided, it appears likely that the policy would constitute a life insurance policy within the meaning of subsection 138(12). While not necessarily conclusive, where a product provides for a death benefit or constitutes an annuity arrangement, it may suggest that it could be a life insurance policy for purposes of the Act. If the policy does fall within the definition, it would not be considered to be capital property.

At the time of your immigration into Canada in 1975, there would be no deemed disposition and reacquisition of the policy immediately before or immediately after that time, as the case may be, because the policy was not a capital property and the rule in former subsection 48(3) of the Act did not apply.

For purposes of subsection 12.2(1) of the Act, where a life insurance policy was last acquired before 1983, there was no requirement to report any accrued income of the policy on a triennial basis (under former subsection 12.2(3)) or on an annual basis (under subsection 12.2(1)) as the case may be.

On the maturity of a life insurance policy, an individual is considered to have disposed of a policy under the definition of "disposition" under subsection 148(9) of the Act. As a result, the individual is required to report income under paragraph 56(1)(j) of the Act equal to the amount by which the proceeds of disposition exceeds the adjusted cost base of the policy to the policyholder, pursuant to subsection 148(1) of the Act. Please refer to Interpretation Bulletin IT-87R2, Policyholders Income from Life Insurance Policies, which contains information about the calculation of the adjusted cost base of a policy.

We trust these comments will be of some assistance.

Yours truly,

G. Moore
For Director
International Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch