4 January 1999 External T.I. 9821225 - TRANSFER OF LIFE 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.

Principal Issues:

Tax reporting of a disposition of an interest in a life insurance policy on the death of the policyholder.

Position:

Provided general comments on T5 reporting and the rollover treatment provided in subsection 148(8.2) where the policy is transferred to the policyholder’s spouse as a consequence of death.

Reasons:

See above.

XXXXXXXXXX 								982122

Attention: XXXXXXXXXX

January 4, 1999

Dear Sirs:

Re: Transfer of Ownership of a Life Insurance Policy on Death

This is in response to your letter of August 6, 1998 and further to our telephone conversation (XXXXXXXXXX/Leigh) of December 11, 1998, concerning a transfer of ownership of a life insurance policy on the death of the policyholder in circumstances where the life insured is a third party.

You have asked for clarification on whether a T5 slip should be issued when ownership of the policy is transferred to another person or to the policyholder’s estate on the death of the policyholder. Where the life insured is a third party, the death of the policyholder will result in a disposition of the policy for income tax purposes. Subject to the rollover treatment provided in subsections 148(8) and (8.2) of the Income Tax Act (the “Act”), a T5 slip should be prepared in the name of the deceased to report any gain resulting from the disposition in the deceased policyholder’s final tax return. If the policy is an exempt policy, subsection 148(7) of the Act would apply to determine the policyholder’s proceeds of the disposition. If the policy is a non-exempt policy last acquired after December 1, 1982, paragraph 148(2)(b) of the Act would apply with the result that any income accrued to the date of death that has not been reported would be included in the income of the deceased policyholder.

The other situation you are concerned with is where the husband is the policyholder but there is no contingent owner (i.e., successive owner) named in the policy and the wife or dependent child is the life insured. The husband dies and the insurer receives a notice of death but is not advised for some time afterwards with respect to the provisions of the policyholder’s will. As a result, the insurer may not be aware that the ownership of the policy is to be transferred to another person (other than the policyholder’s estate) on the policyholder’s death. Your queries relate to the preparation of T5 slips in such circumstances and whether subsection 148(8.2) of the Act would apply if the terms of the policyholder’s will provide that the ownership of the policy is to be transferred to the policyholder’s wife.

As you know, T5 slips for a calendar year must be distributed to the respective recipients on or before the end of February of the following year. Accordingly, the insurer must determine before the due date whether a T5 slip should be issued based on the information available to the insurer. If, subsequent to issuing the T5 slip, the insurer finds that the T5 slip contains an error, the insurer should issue an amended T5 slip.

With regard to subsection 148(8.2) of the Act, the effect of this subsection is to provide rollover treatment with respect to a transfer or distribution of a policyholder’s interest in a life insurance policy to the policyholder’s spouse as a consequence of the policyholder’s death, unless an election is made in the policyholder’s return for the year of death not to have this subsection apply. It is our view that the transfer of ownership of the policy to the policyholder’s spouse pursuant to the terms of the policyholder’s will would constitute a transfer as a consequence of death by virtue of paragraph 248(8)(a) of the Act. Accordingly, subsection 148(8.2) of the Act would apply to allow the transfer to be made on a tax-deferred basis if the other requirements in the provision are met. We note that it is not necessary to issue a T5 slip in such circumstances since there is no gain to be reported.

While we hope 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 in respect of any particular situation.

Yours truly,

Manager
Financial Institutions Section
Financial Industries Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch