7 September 1993 Administrative Letter 9320932 - DISPOSITION OF LIFE INSURANCE POLICY BY NR (4093-I5)

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.

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the Department.

Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle du ministère.

												932093
XXXXXXXXXX							Jim Wilson
(613) 957-2123

September 7, 1993

Dear Sirs:

Re: Disposition of Life Insurance Policies by a Non-Resident of Canada

We are writing in reply to your letter dated July 6, 1993, in which you requested our comments concerning the Canadian taxation of a resident of Ireland on the redemption of his Canadian life assurance policy. More specifically, your client has been advised by the life assurance company that a non-resident withholding tax of 25% must be deducted from the proceeds and you requested our opinion whether your client is entitled to a refund of those taxes.

For the purposes of our reply we have assumed that the individual is currently a resident of Ireland for purposes of the Canada-Ireland Income Tax Convention and that he acquired the particular life insurance policy at a time when he was a resident of Canada.

General Comments

Where a non-resident of Canada disposes of his interest in a "life insurance policy in Canada", the income arising on such disposition is computed in accordance with subparagraph 115(1)(a)(vi) and subsection 148(1) of the Income Tax Act ("Act"). Such income is taxable in Canada at marginal rates rather than a flat rate as is the rule for certain other amounts paid or credited to non-residents of Canada such as interest and dividends. A "life insurance policy in Canada" is defined in paragraph 138(12)(g) of the Act to mean 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. The amount taxable in Canada, which would be equal to the amount that would have been required to be included in income under the Act had the taxpayer been resident in Canada at the time he disposed of the policy, is the amount, if any, by which the "proceeds of the disposition" of his interest in the policy that the policyholder, beneficiary or assignee, as the case may be, became entitled to receive in the year exceeds the "adjusted cost basis" to the policyholder of that interest immediately before the disposition. The issuer of the policy will normally provide the taxpayer with the values to be assigned to each to these terms.

We have enclosed, for your information, Interpretation Bulletin IT-420R3 and refer you in particular to paragraph 18(g) which covers the situation raised in your inquiry. Also enclosed is a 1992 General Tax Guide for Non-Residents of Canada (the 1993 guides are not available until early 1994). This tax guide, in addition to tax tables, includes two copies of the Canadian tax returns that would be required to be filed by the non-resident of Canada to report the income from the disposition of the insurance policy. Again you should note pages 45 and 46 of the guide which provide general information for non-residents of Canada relevant to your inquiry.

Pursuant to subsection 116(5.3) of the Act, the purchaser acquiring the life insurance policy, the insurer under the policy by virtue of subsection 116(5.4) of the Act, is liable to pay, on behalf of the non-resident, 50% of the amount, if any, by which the amount payable by the taxpayer for the property so acquired exceeds the amount fixed in the certificate, if any, issued under subsection 116(5.2) of the Act. Therefore, if no certificate is obtained, the insurer is liable to pay, on behalf of the non-resident, an amount equal to 50% of the proceeds of disposition of the life insurance policy.

It is not clear why the insurer advised your client that a 25% withholding tax will be deducted from the proceeds. Regardless, any withholding by the insurer does not represent a definitive tax, rather the withholding is considered as a payment on account of the non-resident's overall tax liability. To avoid any withholding by the insurer, the non-resident may apply for a certificate that would authorize the insurer not to withhold. However, the non-resident would have to provide the Department with acceptable security or pay the estimated taxes owing. You may wish to refer to the attached copy of Information Circular 72-17R3 for more information. Page 46 of the tax guide may also be helpful in this regard.

In the event the insurer has withheld, such withholdings would be creditable against the taxpayer's Canadian tax liability. The non-resident of Canada must file a Canadian tax return reporting the transaction for the year of disposition and a refund would be issued in the event the withholding tax exceeds the taxpayer's ultimate tax liability.

Application of the Canada-Ireland Income Tax Convention (the "Treaty")

Pursuant to paragraph 1 of Article VI of the Treaty, "the rate of Canadian tax on income (other than income from carrying on business in Canada or from performing duties in Canada) derived from sources within Canada by a resident of Ireland shall not exceed 15 per cent". Accordingly, Canada's right to tax the lump sum receipt of income from the disposition of a life insurance policy in Canada would be limited to 15% of the excess referred to above. Upon application by the non-resident for a certificate as described above, paragraph 1 of Article VI of the Treaty would be taken into consideration by the Department and a payment of 15% of the taxable portion of the income arising from the disposition of the policy (i.e. the estimated tax) or acceptable security thereon may be accepted. In the event a certificate was not applied for and the insurer withholds 50% of the proceeds, the non-resident would be refunded the difference upon the filing and subsequent assessment of his Canadian tax return. In this regard, an explanation should be filed with the return pointing out that paragraph 1 of Article VI of the Treaty applies and the Canadian tax should not exceed 15% of such excess.

We trust you will find the above comments to your satisfaction. If you have any further comments, please note the toll free telephone number on page 48 of the general tax guide.

Yours truly,
for Director
Reorganizations and Foreign Division
Rulings Directorate
Legislative and Intergovernmental
Affairs Branch