5 November 1996 External T.I. 9634595 - DISPOSITION OF A LIFE INSURANCE POLICY - EMIGRATION

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.

Principal Issues:

1.Is the policyholder considered to have a disposition of the life insurance policy as a result of the policyholder ceasing to be a Canadian resident ("emigrates")?

2.What are the income tax implications, if any, of changing the cash values under the life insurance policy to a foreign currency, or of the insurer "changing the administration of the life insurance policy" to its foreign branch?

Position:

1.Discussed in general terms since the taxation is dependent on the facts of a particular case (ie: type of policy, values, taxpayer's personal situation etc.). However, deemed disposition should occur for most, if not all life insurance policies, under paragraph 128.1(4)(b) of the Act after October 1, 1996, based on October 2, 1996 press release by Finance.

2. Not clear as to what is meant by a of "change in administration" - unable to comment. Change in currency, depending on situation, may or may not cause a disposition of policy under the Act - this remains a question of fact and law.

Reasons: See above.

XXXXXXXXXX							963459

Attention: XXXXXXXXXX

November 5, 1996

Dear Sirs:

Re: Life Insurance Policy - Owner Ceases to be a Canadian Resident

This is in reply to your letter dated October 18, 1996, concerning the income tax consequences under the Income Tax Act (the "Act") where the owner of a life insurance policy (the "policyholder") ceases to be a Canadian resident. In your letter you ask whether the policyholder is considered to have a disposition of the life insurance policy as a result of the policyholder ceasing to be a Canadian resident ("emigrates"). You also ask what the income tax implications are, if any, of changing the cash values under the life insurance policy to a foreign currency, or of the insurer "changing the administration" of the life insurance policy to its foreign branch.

It is not possible to properly address all the income tax consequences of an individual's emigration from Canada without a complete understanding of all the relevant facts of the particular taxpayer's situation. Moreover, based on the fact that a "life insurance policy" is broadly defined in the Act to include annuity contracts and segregated fund policies, our comments on the income tax consequences arising as a result an individual's emigration from Canada while holding an interest in a "life insurance policy" will be very general and should not be considered as, nor are they intended to be, a complete analysis of all the income tax consequences that may result in any given fact situation.

Should you wish the views of the Department with respect to a completed transaction, you should contact the appropriate local Tax Services Office and provide them with the full particulars of your client's situation (including copies of any contracts). Alternatively, if the situation presented constitutes a proposed transaction, you may request an advance income tax ruling in accordance with the Department's requirements as set forth in Information Circular 70-6R2 dated September 28, 1990 and the related special release dated September 30, 1992. As discussed in paragraph 14(j) of IC 70-6R2 (subject to the comments in paragraph 7) the Department does not ordinarily provide rulings on questions of fact, nor does the Department make recommendations in respect of tax planning initiatives.

Policyholder Ceases to be Resident in Canada

Pursuant to paragraph 128.1(4)(b) of the Act, when a taxpayer emigrates from Canada, the taxpayer is generally deemed to have disposed of, and reacquire, each property owned by the taxpayer at that time and receive proceeds of disposition equal to each property's fair market value. Such deemed proceeds then become the new cost of the property to the taxpayer. Based on the broad definition of property in subsection 248(1) of the Act, an interest in a life insurance policy held by the taxpayer at the time the taxpayer emigrates from Canada will generally be subject to these general rules.

However, excluded from the above described general rules, is any property owned by an individual that would have been "taxable Canadian property" ("TCP") at the time of emigration. While TCP is defined in paragraph 115(1)(b) of the Act, that definition has been expanded in subsection 248(1) of the Act, for purposes of section 128.1 of the Act, to include as TCP, an interest in a "life insurance policy in Canada". A "life insurance policy in Canada" is defined in subsection 138(12) of the Act as meaning 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. Accordingly, an individual emigrating from Canada before October 2, 1996, holding an interest in a "life insurance policy in Canada" would not be subject to the general deemed disposition and reacquisition rules (see post October 1, 1996 rules discussion below). Similar rules apply where an individual becomes a resident of Canada ("immigrates") pursuant to subsection 128.1(1) of the Act.

In addition to the above described rules, an emigrating taxpayer can elect, in accordance with subparagraph 128.1(4)(iv) of the Act, to defer the deemed disposition and reacquisition on capital property that is not otherwise described in subparagraphs 128.1(4)(i) to (iii) of the Act, provided adequate security is provided by the taxpayer. However, this election is not possible on most interests in a life insurance policy since such property is not normally considered to be capital property. Capital property is defined by section 54 of the Act as meaning depreciable property, and any property (other than depreciable property), the gain or loss from the disposition of which would result in a capital gain or capital loss. Pursuant to subsection 39(1) of the Act, a taxpayer holding an interest in a life insurance policy is not able to realize a capital gain or loss on the disposition of a life insurance policy, except where the policyholder's interest in a life insurance policy is deemed by paragraph 138.1(1)(e) of the Act to be an interest in a related segregated fund trust.

The Department of Finance announced in News Release #96-066 dated October 2, 1996, that paragraph 128.1(4) of the Act will be amended to provide for a mandatory deemed disposition and reacquisition at fair market value of all an individual's property, including TCP, other than property that is:

(i)real property situated in Canada;

(ii)capital property used in, or property described in an inventory of, a business carried on by the individual through a permanent establishment in Canada immediately before that time; and

(iii)property described in subparagraph 128.1(4)(b)(iii), (v) or (vi) of the Act.

These proposed rules, if enacted as described in the aforementioned News Release, will apply to anyone who emigrates from Canada after October 1, 1996. Accordingly, an individual who holds an interest in a "life insurance policy in Canada" will no longer be exempt from the general deemed disposition and reacquisition rules, unless one of the above noted exceptions applies.

Where an individual is resident in Canada for only part of a year (i.e., the year of entry to, or departure from, Canada) section 114 of the Act provides special rules to determine the taxable income of the individual for that particular year. The effect of section 114 of the Act is that generally speaking, the individual will be taxed in Canada based on their world income for the part of the year while resident and only on certain Canadian source income for the part of the year while a non-resident that would be included in taxable income of a non-resident under section 115 of the Act. Section 114 of the Act contains various rules that modify the general rules that apply for taxing non-residents under section 115 of the Act.

As an example, if an individual emigrates from Canada and is deemed by paragraph 128.1(4)(b) of the Act to have disposed of an interest in a life insurance policy to which subsection 148(1) of the Act applies, the excess of the deemed proceeds of disposition (i.e., fair market value of the policy) over the adjusted cost base of the policy (i.e., defined in subsection 148(9) of the Act), if any, would be included in that individual's income for tax purposes for the part of the year while resident in Canada by virtue of paragraph 56(1)(j) of the Act. Section 217 of the Regulations to the Act ("Regulations"), requires the insurer, when a party to the disposition of a life insurance policy, or when notified in writing of a disposition of a life insurance policy, to make an information return in respect of the amount required to be included in the taxpayer's income under paragraph 56(1)(j) of the Act.

It should be noted that subparagraph 115(1)(a)(vi) of the Act, would also require a non-resident individual, who at no time in a taxation year is resident in Canada (or in the year of departure as modified by subsection 114.1 of the Act), to include in the calculation of the taxpayer's taxable income earned in Canada for that year, the amount that would have been included in computing the taxpayer's income by virtue of subsection 148(1) of the Act, had the taxpayer been resident in Canada throughout the year. We would note, however, that this rule only applies to a life insurance policy that is a "life insurance policy in Canada".

Change in Administration and Currency of Policy

It is not entirely clear as to what would be entailed by a "change in the administration" of the life insurance policy. If this results in changes to the terms or conditions of the policy, which would include a currency change, then a determination would have to be made as to whether there would be a disposition of the policy, either by reason of operation of law, or by reason of such changes being so fundamental as to result in the disposition of the life insurance policy and the acquisition of a new policy. Such a determination can only be made on a case by case basis and we are unable to provide you with a definitive response without reviewing the facts of a particular situation and the terms of the proposed amendment, if any. We can, however, offer the following general comments.

Where the currency of reference for payments that are required to be made under a life insurance policy is changed to permit the payment of these amounts in another currency, whether by way of actual amendment to the existing terms and conditions of the life insurance policy, or by mutual agreement by the policyholder and the insurer, such a change would not appear, by itself, to be of such a fundamental nature as to result in the disposition of the policy and the acquisition of a new policy, where:

(a)the amount of the benefits under the existing policy, but for any difference in the currency exchange rates, are not otherwise altered; and

(b)the change does not result in any additional cost to the policyholder or the insured.

While we trust the foregoing comments are useful they are given in accordance with the practice referred to in paragraph 21 of IC 70-6R2 and are not binding on the Department.

Yours truly,

for Director
Financial Industries Division
Income Tax Rulings and
Interpretations Directorate
Policy & Legislation Branch