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.
THE CONFERENCE FOR ADVANCED LIFE UNDERWRITING
1993 Annual Conference
Question 8
Various provisions of the Income Tax Act apply to life insurance policies "last acquired" after a specified date. The policyholder and the insurance company may modify the terms and conditions of a life insurance contract from time to time after issue.
What guidelines does Revenue Canada use to determine whether a change in the terms and conditions of a policy will be considered to be a new acquisition for purposes of the above-mentioned provisions?
If a new acquisition is considered to occur upon a change of the terms and conditions of a life insurance policy, will a deemed disposition also be deemed to have occurred and, if so, how will the proceeds of disposition be determined?
Response
Pursuant to paragraph 148(10)(d), unless otherwise provided in the Act, a disposition or acquisition is deemed not to occur as a result only of the exercise of any provision of the policy. A change to the terms and conditions of a policy made in the context of paragraph 148(10)(d) will therefore not give rise to the acquisition of a new policy.
Otherwise, it is a question of fact whether a change to the terms and conditions of a life insurance policy is so fundamental as to result in the acquisition of a new policy. Such a determination can only be made on a case by case basis and the Department has no guidelines as such.
Where a change results in a new policy, it is our view that the former policy has been disposed of and that the proceeds of the disposition will be the fair market value of the new policy, which amount will also be the cost of the new policy. Factors to be considered in determining the fair market value of an interest in a life insurance policy are set out in paragraphs 40 and 41 of Information Circular No. 89-3.
If a change does not in itself result in a disposition, but causes the policy to cease to be exempt such that paragraph 148(2)(d) applies, there is a deemed disposition for proceeds equal to the accumulating fund, and a deemed acquisition at a cost of that same amount.
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© Her Majesty the Queen in Right of Canada, 1993
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© Sa Majesté la Reine du Chef du Canada, 1993
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