27 January 2025 Internal T.I. 2024-1025011I7 - Foreign Mortgage Insurance Plan

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 a Dutch mortgage savings policy acquired by a non-resident individual when the individual later immigrates to Canada.

Position: General comments provided.

Reasons: Unable to provide a definitive response due to insufficient information. When a policy is issued by a non-resident insurer, the required information to determine the tax implications is usually not available.

									January 27, 2025

Ana-Maria Tarres							HEADQUARTERS
Senior Technical Advisor 					Income Tax Rulings
XXXXXXXXXX								Directorate
									Alex Johnstone

									2024-102501

Re: Dutch mortgage insurance plan

All references herein to a statute are to the relevant provision of the Income Tax Act R.S.C. 1985 (5th Supp.), c.1, as amended, (the Act), or, where appropriate, the Income Tax Regulations, C.R.C., c.945, as amended (the Regulations).

We are writing in response to your email of June 24, 2024 and our meeting of October 21, 2024 (Tarres/XXXXXXXXXX/Johnstone/Naufal) whereby you requested our views on the income tax treatment of a lump sum amount received by a taxpayer resident of Canada (Taxpayer) under a Dutch savings/insurance policy (Policy). We also acknowledge the correspondence you received from the Taxpayer. We apologize for the delay of our response.

Briefly, based on the information submitted, the Taxpayer acquired the Policy to secure a mortgage on a house in 1994 while a citizen and resident of The Netherlands. The Policy was described as a savings mortgage that includes a life insurance component. Under the terms of the Policy, the Taxpayer paid monthly premiums that accumulated tax-free over the term of the Policy. The Taxpayer immigrated to Canada in 2009 and continued to pay premiums under the Policy. The Taxpayer sold the house in 2019 and paid off the mortgage with the sale proceeds. In 2023, the Policy matured and the Taxpayer received a lump-sum amount from the issuer of the Policy.

Our comments

Life insurance policy

The term “life insurance policy” is broadly defined in subsection 138(12) of the Act and whether a particular product is a life insurance policy is generally a question of fact. While not necessarily conclusive, where a product provides for a death benefit or constitutes an annuity arrangement, it may be suggestive that it could be considered a life insurance policy for the purposes of the Act. Based on the limited information provided, it appears that the Policy may constitute a life insurance policy within the meaning of subsection 138(12) of the Act.

Immigration

In general terms, under paragraph 128.1(1)(b) of the Act, when an individual immigrates to Canada and becomes a Canadian resident, the individual is deemed to have disposed of each property (other than certain property as described in that paragraph) owned by the individual immediately before that time for proceeds of disposition equal to the fair market value of the particular property at that time. Moreover, under paragraph 128.1(1)(c) of the Act, the individual is deemed to have reacquired each such property so disposed of at a cost equal to the amount of the deemed disposition proceeds. Very generally, the effect of these deeming provisions is that, for purposes of computing Canadian income tax, an individual who becomes resident in Canada will have a cost base for most of the individual’s property that is equal to the fair market value of the property upon entering Canada.

It should be noted that, the deemed disposition described in paragraph 128.1(1)(b) of the Act would generally not apply to a taxpayer’s interest in a “life insurance policy in Canada”, which is defined in subsection 138(12) of the Act as a life insurance policy issued or effected by an insurer upon the life of a person resident in Canada at the time the policy was issued or effected.

Annual accrual

When a taxpayer holds an interest in a life insurance policy last acquired after 1989, subsection 12.2(1) of the Act generally requires the taxpayer to report accrued income relevant to the policy on an annual basis. As described in the previous section, where subsection 128.1(1) of the Act applies, a taxpayer will be deemed to have “last acquired” the policy at the time the taxpayer became resident in Canada for the purposes of subsection 12.2(1) of the Act at a cost equal to the fair market value of the policy upon entering Canada.

In general terms, the amount of the accrual under subsection 12.2(1) of the Act is based on the excess of the policy’s “accumulating fund”, as defined in section 307 of the Regulations, each year, over its “adjusted cost basis” (ACB), as defined in subsection 148(9) of the Act. The accumulating fund is essentially a measure of the accumulating investment growth or build-up over time. The ACB of a policyholder’s interest in a life insurance policy is, in general terms, defined as the cost of the interest in the policy acquired by the policyholder plus the amount by which the cash premiums paid by the policyholder, and any income in respect of the policy that has previously been reported for tax purposes.

The annual accrual does not apply to interests in certain annuity contracts or a life insurance policy that is an “exempt policy”. An “exempt policy”, for income tax purposes, is a life insurance policy that satisfies certain criteria, set out in section 306 of the Regulations. The rules in section 306 of the Regulations apply on a policy-by-policy basis and require actuarial calculations and information that only the issuing insurer will possess. In broad terms, an exempt policy is a policy that is primarily designed to fund a death benefit, rather than one designed to be an investment and savings vehicle. A life insurance policy issued by a non-resident insurer is not specifically precluded from qualifying as an exempt policy and thus, such a policy could qualify as an exempt policy provided the criteria in section 306 of the Regulations are satisfied.

Maturity and policy gain

Under the Act, a payment resulting from the death of the insured person under a life insurance policy (other than an annuity contract) that is an exempt policy, is not a disposition. As a result, such payment is received tax-free.

However, the maturity of a life insurance policy results in a disposition of a policyholder’s interest in the policy under subsection 148(9) of the Act. As a result, the policyholder is required to include, in computing income, a policy gain in respect of the disposition, computed as the amount by which the proceeds of the disposition (PoD) exceeds the policyholder’s ACB (see previous section) of that interest immediately before the disposition. A life insurance policy is not a capital property and therefore the full amount of the policy gain is required to be reported by the taxpayer in computing income.

Similar to our comments above regarding exempt policies, the determination of the amounts that are used to compute any policy gain with respect to a life insurance policy [e.g., PoD, ACB] generally requires information that is available only in the accounts of the issuer of the policy (i.e., the insurer).

Foreign Property Reporting

Finally, we would add that the foreign property reporting rules set out in section 233.3 of the Act require a person that owns “specified foreign property”, the total cost of which exceeds $100,000 at any time in the year, to file a prescribed form (T1135) by that person’s normal tax return filing deadline under Part I of the Act. A “specified foreign property” is defined in subsection 233.3(1) of the Act and could include, where applicable, a taxpayer’s interest in a foreign life insurance policy. In this regard, the $100,000 test is applied to the “cost amount” of all specified foreign property of the taxpayer, computed in the aggregate. Accordingly, where the aggregate of the cost amount of all the specified foreign property held by a taxpayer exceeds $100,000, the taxpayer will be required to report each specified foreign property the taxpayer holds, even though no particular specified foreign property has a cost amount exceeding $100,000.

We trust our comments will be of assistance.

Yours truly,

Bob Naufal
Manager
for Director
Financial Industries and Trusts Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch