15 February 1995 External T.I. 9414105 - DISPOSITION OF AN INSURANCE POLICY

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.

RULINGS DIRECTORATE
CORRESPONDENCE SUMMARY

Principal Issues:

WHETHER THE AMENDMENT OF THE TERMS AND CONDITIONS OF A LIFE INSURANCE POLICY TO ALLOW POLICYHOLDERS TO ACCESS A POLICY'S CASH SURRENDER VALUE WOULD CONSTITUTE A DISPOSITION OF THAT POLICY.

Position TAKEN:

	QUESTION OF FACT THAT WOULD HAVE TO BE DETERMINED ON A 						             CASE BY CASE BASIS. 

Reasons FOR POSITION TAKEN:

LEGISLATION - SUBSECTION 148(10) & FORMER POSITIONS. SEE ALSO QUESTION 8 OF 1993 ADVANCED LIFE UNDERWRITERS CONFERENCE.

    		941410
XXXXXXXXXX     			G. Donell

Attention: XXXXXXXXXX
February 15, 1995

Dear Sir:

Re: Prepayment of Life Insurance Premiums

This is in reply to your letter of May 20, 1994 and further to subsequent telephone discussions, concerning the tax treatment of life insurance policies where the terms and conditions are amended to allow partial surrenders of the policy. We apologize for the delay of our response.

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 disposition of the policy and the acquisition of a new policy. Such a determination can only be made on a case by case basis and we are therefore unable to provide you with a definitive answer without reviewing a particular policy and the terms of the proposed amendment. We can however offer the following general comments.

A partial surrender is considered to be a partial disposition of the policy and the income, if any, of the taxpayer resulting from the partial disposition is computed pursuant to subsection 148(4) of the Act with respect to life insurance policies last acquired after December 1, 1982 or an annuity contract. The "adjusted cost basis" ("ACB") of an interest in a life insurance policy is determined pursuant to subsection 148(9) of the Act and the ACB of the portion of the interest disposed of is determined pursuant to subsection 148(4) of the Act. Pursuant to that provision the ACB of the part interest is the proportion of the ACB 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. It is a question of fact, however, whether the calculation, under subsection 148(4), will result in the realization of any income for tax purposes.

Subsection 12.2(1) of the Act requires the annual accrual of the savings accumulation within a life insurance policy measured by the amount by which the accumulating fund exceeds the adjusted cost basis of the policy. Paragraph 12.2(1)(a) of the Act provides that the annual accrual will not apply to life insurance policies that are "exempt policies" as defined by section 306 of the Income Tax regulations ("regulations"). Generally the exempt status of a policy is determined by reference to the accumulating fund, within the meaning of that term in section 307 of the regulations, of an "exemption test policy" ("ETP") and the determination of whether any life insurance policy is an "exempt policy" would be a question of fact that can only be answered in relation to a specific point in time with regards to a specific policy.

However, in general, it is our understanding that a partial surrender, as you have described, will result in a reduction in the policy's death benefit which will result in an equivalent reduction in the policy's accumulating fund. As this would also have the effect of reducing the accumulating fund of the ETP by a commensurate amount, it is our view that a partial disposition of an exempt policy will not generally, in and of itself, result in the loss of a policy's exempt status.

We trust that the above comments are of assistance to you.

Yours truly,

Director
Financial Industries Division
Rulings Directorate
Policy & Legislation Branch