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: Where a non-resident taxpayer transfers a life insurance policy in Canada to a non-arm's length person, what are the CRA's expectations for compliance?
Position: The purchaser is liable to withhold and remit an amount pursuant to subsection 116(5.3). However, where the non-resident vendor pays an amount on account of tax or provides adequate security, the CRA will issue a Certificate of Compliance under subsection 116(5.2), which could reduce the amount of withholding required under subsection 116(5.3).
Reasons: The legislative requirements.
CLHIA Roundtable May 2013
Question 5 - Section 116 Withholding: Related Party Transfers
Where a life insurance policy in Canada is transferred from a non-resident to a related party for no consideration, subsection 116(5.1) provides that the proceeds of disposition are deemed to be the fair market value of the policy. Assuming the non-resident vendor has not obtained a certificate under subsection 116(5.2), the related withholding to be paid by the purchaser would be 50% of the fair market value of the policy in accordance with subsection 116(5.3).
For example, this could apply where:
A person purchased a policy while resident in Canada and then subsequently moved to the U.S., and
that person subsequently transferred the policy to a U.S. irrevocable life insurance trust (ILIT).
Applying the legislation to this scenario appears to be unreasonably harsh since a policy with no cash surrender value could still have a non-zero fair market value leading to significant problems from a valuation perspective. We note that requiring withholding based on cash surrender value rather than fair market value would be generally consistent with the determination of proceeds of disposition under subsection 148(7) for non-arm's length transfers. This approach would avoid valuation issues and, therefore, would be more reasonable.
Since the transfer described above does not involve a disposition covered by subsection 116(5.4), the life insurance company has no withholding obligations under section 116.
Question
What are CRA's expectations for compliance with this section by people such as the trustees of the ILIT to whom the policy is being transferred?
CRA Response
In accordance with the definition of disposition under subsection 148(9) of the Income Tax Act (ITA), a transfer of a life insurance policy in Canada to a trust would constitute a disposition of an interest in a life insurance policy. If the life insurance policy is disposed of by way of a gift or in any manner whatever to a non-arm's length person, the proceeds of the disposition are determined in accordance with subsection 148(7). The gain on the disposition of the interest is determined in accordance with subsection 148(1).
In the particular circumstances you have provided, under subsection 116(5.3), the purchaser (trust) is liable to pay as tax on behalf of the non-resident vendor 50% of the amount by which the amount payable for the life insurance policy in Canada at the time it was transferred exceeds the amount fixed in a Certificate of Compliance, if any, issued by CRA under subsection 116(5.2). In this regard, paragraph 116(5.1)(f) deems the amount payable by the purchaser (trust) to acquire the life insurance policy to be the fair market value of the policy at the time it was transferred. Therefore, the amount of the withholding tax payable on behalf of the non-resident vendor by the purchaser (trust), in accordance with subsection 116(5.3), is based on the fair market value of the life insurance policy at the time it was transferred.
The non-resident vendor can choose to pay as or on account of tax under Part I of the ITA such amount as acceptable to the Minister or furnish the Minister with acceptable security with respect to the transfer. The issuance of a Certificate of Compliance by the Minister in this respect may reduce or eliminate any amount that the purchaser (trust) would be liable to pay under subsection 116(5.3).
Original reply prepared by: Claudio DiRienzo, Specialty Audit Division and Margaret McCreery, Industry Specialist Services
Reply edited by: Bob Naufal
May 17, 2013
2013-048141
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