21 November 1991 Administrative Letter 912786 F - Life Insurance Policies

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.

19(1)

Dear Sirs:

Re:  Life Insurance Policies

This is in reply to your letter dated September 13, 1991.

Your letter refers to a situation in which four people own a life insurance policy and one of the owners transfers his ownership to the other three on a non-arm's length basis.  Your first question is whether the four owners should be considered as one entity, the three owners considered a separate entity and the transfer treated as one to which subsection 148(7) of the Income Tax Act (the "Act") applies.  Alternatively, you enquire whether the transfer should be treated as a partial disposition pursuant to subsection 148(4) of the Act.  In either case you are concerned with the determination of the proceeds of the disposition and the adjusted cost basis ("ACB") for purposes of the Act.

We note initially that the Department does not comment on proposed transactions other than by way of advance income tax rulings.  If this is in fact a specific proposal, you may wish to consider requesting an advance ruling following the procedures outlined in Information Circular 70-6R2 dated September 28, 1990.  We do however offer the following comments which are of a general nature.

Your reference to "entity" is somewhat confusing and suggests some uncertainty about policy ownership. In our view, the proper determination of the ownership interests in this type of situation would be of prime importance. This would be a question of fact in any particular case and so we are unable to comment directly on a situation as described in you letter. However, if for example it were determined that each of the four individuals holds a one-quarter undivided interest in the policy, and the non-arm's length transfer by one policyholder (eg."A") of his interest to the other three policyholders is an equal one-third to each, our general views would be as follows.

It is our opinion that such a disposition (provided it is not one described in paragraph 148(2)(b) of the Act) would be one in respect of which subsection 148(7) of the Act would apply.  As such, A's proceeds of the disposition would be deemed to be one-quarter of the value of the policy at the time of disposition. Pursuant to paragraph 148(9)(g) of the Act, "value" means: (a) where the interest includes an interest in the cash surrender value, the amount to which the holder would be entitled if the policy were surrendered at that time, and (b) in any other case, nil.  To the extent such deemed proceeds exceed the ACB of A's interest in the policy, the amount will be included in A's income under subsection 148(1) and paragraph 56(1)(j) of the Act.

Under subsection 148(7) of the Act, each of the other three policyholders would have a deemed acquisition cost of their one-third share of A's interest in the policy equal to one-third of A's deemed proceeds.  Such deemed cost to each of the three remaining policyholders would be added to the ACB of each as determined immediately before the disposition to arrive at the ACB of each immediately after the transfer.

As noted, our comments are of a general nature and may not necessarily apply in the circumstances of a specific situation; nevertheless we hope this will be of assistance.

Yours truly

for DirectorFinancial Industries DivisionRulings Directorate