26 June 1997 External T.I. 9706605 - STOP-LOSS GRANDFATHERING

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:

Application of the grandfathering provisions (Clause 57(10)(b) of Bill C-69) to subsections 112(3) to (3.32) where a new life insurance policy is issued after April 26, 1995.

Position:

General comments provided. Where a corporation is not a beneficiary of a life insurance policy on April 26, 1995 grandfathering will not apply. A subsequent change of beneficiary will not be accepted.

Reasons:

Clause 57(10)(b) of Bill C-69. 1997 (first reading).

XXXXXXXXXX 970660

Attention: XXXXXXXXXX

June 26, 1997

Dear Sirs:

Re: Grandfathering Provisions

This is in reply to your letter of March 6, 1997, wherein you requested our views on the application of the grandfathering provisions to the proposed changes to subsections 112(3) to (3.32) (herein referred to as the "stop-loss rules") of the Income Tax Act (the Act") that were originally introduced in the April 26, 1995, draft technical amendments to the Act and are now included, in revised form, in Bill C-69 (first reading dated December 2, 1996 - herein referred to as "Bill C-69").

In your letter you outline a situation whereby a shareholder of a corporation applies for life insurance prior to April 26, 1995 but the life insurance policy is not actually issued to the shareholder, who is both the initial policy owner and beneficiary, until sometime after April 26, 1995. Subsequently, the corporation acquires the policy from the shareholder and it becomes the beneficiary under the policy since it was always intended that the life insurance proceeds be used for the purpose of financing a future redemption of the shareholder's shares. In your letter you also refer to a letter written by Mr. Len Farber of the Department of Finance to XXXXXXXXXX dated February 12, 1997, which describes further proposed changes to the grandfathering provisions. It is your view that in the situation you described in your letter the policy would be grandfathered from the application of the stop-loss rules since the application for life insurance was made before April 26, 1995.

Our Comments

While we can provide you with some general comments we cannot address your specific situation in a letter of opinion. Should you wish confirmation of the income tax consequences with respect to a specific proposed transaction you may request an advance income tax ruling in the manner set out in the Department's Information Circular 70-6R3 dated December 31, 1996. Confirmation with regard to a completed transaction may be requested from the appropriate district tax services office. We would also note that we will not comment on proposals or comments made in letters written by the Department of Finance since our mandate is restricted to the interpretation of legislation. Should you wish clarification of such comments or proposals you should contact the author thereof.

The changes to the stop-loss rules, inter alia, are intended to generally apply to all share dispositions that occur after April 26, 1995 where such disposition results in a capital loss and dividends, including capital dividends, were received on the share by the shareholder. However, Clause 57(10)(b) of Bill C-69 provides transitional relief from the application of the proposed stop-loss rules where the taxpayer disposes of the share to a corporation (and that share was owned by the taxpayer on April 26, 1995) pursuant to an agreement made in writing before April 1997, where, inter alia, the corporation was a beneficiary of a life insurance policy on April 26, 1995 (emphasis added) that insured the life of the taxpayer and it was reasonable to conclude on April 26, 1995 that the proceeds of the policy were primarily intended to fund the redemption, acquisition or cancellation of the share.

To qualify for transitional relief under Clause 57(10)(b), a taxpayer must clearly demonstrate that all the required conditions relating to a life insurance policy that existed on April 26, 1995, including the purpose requirement, were met at that time. However, it is our view that where a previously grandfathered policy was subsequently modified, altered, cancelled or replaced with a "new" policy, such an event should not have any consequences to the grandfathering provisions as they currently read in Bill C-69. Accordingly, grandfathering is a factual determination to be made with reference to the terms and conditions of the policy and the purpose for which it was issued as at April 26, 1995.

While not mentioned specifically in your letter, we understand that an insurer may frequently provide for "temporary coverage" between the date on which the insured makes an application for a life insurance policy and the date on which the life insurance policy is finally issued.

In this regard we have been advised that in order for temporary coverage to be considered as an insurance policy (i.e., referred to as "conditional insurance agreement" in Ontario), an actual life insurance policy must be issued in respect of such temporary coverage by a life insurer since, for example, under the Insurance Act of Ontario a life insurance policy can only take effect after it has been delivered by the life insurer. It is our understanding that a "conditional insurance agreement" is a separate life insurance policy issued before the main life insurance policy is issued and that it will normally be issued for a substantially reduced amount (from the main life insurance policy) of insurance coverage. It appears to us that if such an agreement is considered as a life insurance policy for purposes of the Insurance Act of Ontario then it would also be a life insurance policy for purposes of Clause 57(10)(b). It would then be a factual determination as to whether or not this "temporary" life insurance policy otherwise meets the requirements set out in Clause 57(10)(b).

Where temporary coverage constitutes an insurance policy and an individual is the beneficiary under that policy the condition in Clause 57(10)(b) that a particular corporation be the beneficiary under the policy would not be met. Therefore, the shares held by the shareholder on April 26, 1995 will not be grandfathered. This will be the case notwithstanding that the beneficiary under any subsequent policy was the corporation. If the temporary coverage does not constitute an insurance policy the shares held by the shareholder on April 26, 1995 will not be grandfathered as no life insurance policy would have been in existence on that date.

While we trust the foregoing comments are useful they are given in accordance with the practice referred to in paragraph 22 of Information Circular 70-6R3 dated December 30, 1996 and are not binding on the Department.

Yours truly,

F. Lee Workman
Section Chief
Financial Institutions Section
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch