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: Is there a disposition under subsection 148(1) when a policyholder exercises his or her contractual right to split a universal life insurance policy between the two lives insured? How would the exemption test policy, accumulating fund and adjusted cost basis of the two policies be determined?
Position: Question of fact. General comments provided.
Reasons: The Income Tax Act does not provide for the splitting of a multiple life insurance policy into separate policies.
XXXXXXXXXX Jennifer Omstead
February 17, 2016
Re: Splitting of a multiple life insurance policy
This is in response to your letter of August 28, 2015 and further to our telephone conversation of January 7, 2016 concerning the income tax implications of exercising a contractual right to split the coverage on one life insured of a life insurance policy that insures more than one life into a separate policy. In particular, you have asked for our views on whether there is a disposition under subsection 148(1) of the Income Tax Act (the Act) and whether paragraph 148(10)(d) of the Act would apply in the following hypothetical situation.
A taxpayer is the policyholder of a universal life insurance policy that provides life insurance coverage on the lives of the taxpayer and the taxpayer’s child (“additional insured”). Both coverages have cost of insurance charges that apply for 10 years and coverage as long as the life insured is alive. The cost of insurance charges for each coverage is based on the age, gender, and smoking status of the life insured when the policy was issued. Each coverage has guaranteed cash values based on the same characteristics. The policy gives the policyholder the contractual right to split the coverage on the additional insured from the life insurance policy and to set up a separate policy that has the same death benefit, same cost of insurance charges and same guaranteed cash values as would have been provided for the additional insured within the policy that covers both lives. In exercising this right, the policyholder can opt to be the owner of the separate policy but if the policyholder does not do so, the additional insured will be the owner of the separate policy issued on his or her life. Assume that the taxpayer opts to be the owner of the separate policy on his or her child’s life.
This technical interpretation provides general comments about the provisions of the Act and related legislation (where referenced). It does not confirm the income tax treatment of a particular situation involving a specific taxpayer but is intended to assist you in making that determination. The income tax treatment of particular transactions proposed by a specific taxpayer will only be confirmed by this Directorate in the context of an advance income tax ruling request submitted in the manner set out in Information Circular IC 70-6R6, Advance Income Tax Rulings and Technical Interpretations.
Where a policyholder under a life insurance policy has disposed of an interest in the policy in the year, subsection 148(1) of the Act generally requires the policyholder to include, in computing income for the year, the amount by which the proceeds of the disposition in respect of that interest exceeds its adjusted cost basis. A disposition for this purpose is defined in subsection 148(9) of the Act to include a surrender or maturity of an interest in the policy or a disposition of that interest by operation of law only.
Paragraph 148(10)(d) of the Act provides that a policyholder will not be deemed to have disposed of or acquired an interest in a life insurance policy (other than an annuity contract) as a result only of the exercise of any provision (other than a conversion into an annuity contract) of the policy. In order to give meaning to the word "only", it is our view that it is necessary to determine whether the changes that are made to the terms of the policy, including but not limited to the premium structure, are so fundamental as to go to the root of the policy. If this were the result, there would be a disposition of the policy and the acquisition of a new policy. Such a determination can only be made after reviewing all the facts and circumstances on a case by case basis.
In the hypothetical situation described, if the taxpayer exercises a contractual right to split the policy into two separate polices, the death benefit, the cost of insurance charges and the guaranteed cash values relating to the original policy would be reduced and a new policy would be created in respect of the coverage on the taxpayer’s child. The Act does not contemplate the splitting of a multiple life insurance policy into separate policies. Accordingly, it is our view that the objective of introducing paragraph 148(10)(d) of the Act was not to provide for a non-disposition of the policy in these circumstances.
It is a question of fact and law whether a disposition of an interest in a life insurance policy occurs. Absent a review of the specific policies, we are unable to provide a definitive answer. We would be prepared to consider a request for an advance income tax ruling on a proposed transaction if all of the necessary information and documentation are submitted.
Finally, we note that Bill C-43 (which received Royal Assent on December 16, 2014) includes legislative amendments applicable for life insurance policies issued after 2016. It specifically provides for life insurance policies with multiple coverages (including multiple life insurance policies) and contains provisions for the exemption test policies and the calculation of the accumulating fund and adjusted cost basis for such policies. However, there are no specific rules providing for the splitting of the policy into separate policies.
We trust that these comments will be of assistance.
Financial Institutions Section
Financial Industries and Trusts Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch
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