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:
WHETHER A PAYMENT TO POLICYHOLDERS UNDER A MORTGAGE (LIFE) INSURANCE POLICY EQUAL TO TEN (10) YEARS OF PREMIUMS IS TAXABLE
POSITION TAKEN:
THE PAYMENT IS CONSIDERED A PARTIAL DISPOSITION. ALL OR A PORTION OF THE PAYMENT WILL BE TAXABLE DEPENDING UPON THE VALUES OF FACTORS SUCH AS THE ACCUMULATING FUND, CASH SURRENDER VALUE, ADJUSTED COST BASIS AND OTHER RELEVANT AMOUNTS.
REASONS FOR POSITION TAKEN:
(1) OPINION EC2104, June 21, 1983, M.E.BARTLEY.
(2) MECHANICS OF THE INCOME TAX ACT; particularly subsections 148(1) & 148(4)
LEGAL:
N/A
FINANCE OPINION:
N/A
JURISPRUDENCE:
N/A
RCT PUBLICATIONS:
N/A
HAA NUMBER:
4724-9 6595-1
XXXXXXXXXX
Attention: XXXXXXXXXX
Dear Sirs:
RE: Mortgage Insurance Cashback Programme
This is in reply to your letter dated October 28, 1993 in which you requested a technical interpretation concerning the treatment for income tax purposes of a payment received by a policyholder from an insurer. In the particular case at hand, the payment would be equal to ten years premiums paid under the policy and would constitute neither a policy loan nor a policy dividend.
It is the view of the Department that the payment contemplated constitutes a partial disposition of the policyholder's interest in the policy. Subsection 148(1) of the Income Tax Act (the "Act") requires that a policyholder include in his or her income for the year the amount by which the "proceeds of disposition" (which in this particular case would be equal to the payment receivable) exceed the "adjusted cost basis" of the part interest of the policy immediately before the disposition.
The "adjusted cost basis" of an interest in a life insurance policy is determined pursuant to paragraph 148(9)(a) of the Act and the "adjusted cost basis" of that part interest in a policy which has been disposed of is determined pursuant to subsection 148(4) of the Act. Pursuant to that provision the adjusted cost basis of the part interest is the proportion of the adjusted cost basis of the policyholder's entire interest in the policy that the proceeds of disposition is of the accumulating fund of that entire interest immediately before the disposition. The accumulating fund with respect to an interest in a life insurance policy is defined in section 307 of the Income Tax Regulations.
Although we trust that our comments are of assistance to you, they do not constitute an advance income tax ruling and are, accordingly, not binding upon the Department to any particular transaction.
Yours truly,
for DirectorFinancial Industries DivisionRulings DirectorateLegislative and Intergovernmental Affairs Branch
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