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: The income tax treatment of benefits provided to a policyholder in the form of guarantees under a segregated fund policy (on death or maturity).
Position: Question of fact but general comments based on an example are provided which explains the provisions of section 138.1 that will apply to the policyholder.
Reasons: The provisions of section 138.1 provide for this treatment to the policyholder.
XXXXXXXXXX 990525
Attention: XXXXXXXXXX
June 17, 1999
Dear Sir:
Re: Segregated Funds and Guarantees
This is in reply to your letter of February 15, 1999, wherein you requested our views on the income tax treatment of guarantees provided on non-registered segregated fund policies under the Income Tax Act (the "Act").
In your letter you ask whether an amount paid by an insurer as a result of a guarantee provided under a segregated fund policy would be received free from income tax by the policyholder or whether such payment should be included in the particular policyholder's income on account of income or as a capital gain.
Your request appears to relate to either a proposed transaction or a completed transaction. Confirmation of the income tax consequences of proposed transactions involving specific taxpayers will only be provided in response to a request for an advance income tax ruling. To make such a request the advance income tax ruling must be submitted in accordance with the guidelines set out in Information Circular 70-6R3 (IC-70-6R3) dated December 30, 1996, issued by Revenue Canada. However, if the situation relates to a completed transaction a request for the Department's views must be made to your local Tax Services Office. Although we are not able to comment specifically on the situation described in your letter we can offer the following general comments that are based on the premise that the guarantee provided on maturity or death actually forms part of the terms of a segregated fund policy issued by an insurer and as such are subject to the provisions of section 138.1 of the Act.
Pursuant to paragraph 138.1(1)(e) of the Act where a policyholder acquires an interest in a segregated fund policy the policyholder is deemed to have an interest in the related segregated fund trust. The guarantee provided by the insurer under the segregated fund policy would normally entitle the policyholder to receive an amount not less than the premiums paid by the policyholder assuming no withdrawals were made by the policyholder in the intervening period. The following example illustrates what we consider to be the general income tax consequences to the policyholder on the surrender of an interest in a segregated fund policy with a maturity or death benefit guarantee.
Assume a policyholder pays a single premium of $1,000 which is deposited in the segregated fund and used to acquire shares at a cost of $1,000. Assume further that the fair market value of the shares held in the segregated fund falls to $800 such that under the terms of the guarantee the insurer is required to contribute an additional $200 of property to the segregated fund (cash in this example).
Where the insurer is required to contribute $200 to the segregated fund trust in respect of the guarantee it is our view that the insurer would have been deemed to have acquired an interest in the segregated fund trust for a cost of $200 pursuant to paragraph 138.1(1)(d) of the Act. Generally, there would be no immediate income tax consequences to the policyholder by virtue of the insurer being required to transfer the $200 to the segregated fund trust pursuant to the terms of the guarantee as long as the policyholder does not otherwise receive or become entitled to receive all or any part of the amount paid.
If the shares held by the segregated fund trust are disposed for their fair market value of $800 this will result in a capital loss of $200 which, if allocated to the policyholder pursuant to subsection 138.1(3) of the Act, would reduce the policyholder's adjusted cost base ("ACB") in the related segregated fund trust to $800 pursuant to paragraph 53(2)(q) of the Act. If the policyholder then surrenders his/her interest in the segregated fund policy for a payment of $1000 (being the total value of all property held in the segregated fund trust) the policyholder would realize a capital gain of $200 on the disposition of his/her interest in the segregated fund trust pursuant to paragraph 138.1(1)(j) of the Act which will offset the capital loss previously allocated.
Where the policyholder dies the policyholder's interest in the segregated fund trust will generally be deemed to have been disposed of immediately before the time of death for its fair market value pursuant to paragraph 70(5)(a) of the Act and the policyholder's estate will be deemed to have acquired the interest in that property for a cost equal to those deemed proceeds pursuant to paragraph 70(5)(b) of the Act. In our view by virtue of the guarantee provided by the insurer the fair market value of the policyholder's interest in the segregated fund trust would be $1000 at that time.
If the shares held by the segregated fund trust had been disposed of and the $200 capital loss allocated to the policyholder pursuant to subsection 138.1(3) of the Act prior to the policyholder's death the policyholder would realize a $200 capital gain on the deemed disposition under paragraph 70(5)(a) of the Act which could offset the $200 capital loss previously allocated to the policyholder as described above.
Alternatively, if no disposition of the shares was made by the segregated fund trust before the policyholder died there would be no gain or loss to allocate to the policyholder and the deemed disposition of the policyholder's interest in the segregated fund trust arising under paragraph 70(5)(a) of the Act would not result in a capital gain or loss. If the shares held in the segregated fund trust were then disposed of subsequent to the policyholder's death the policyholder's estate, or beneficiary, as the case may be the capital loss would be allocated pursuant to subsection 138.1(3) of the Act and the capital gain on surrender of the interest in the segregated fund trust under 138.1(1)(j) of the Act as described above.
The foregoing comments are intended as a general discussion only and, as noted above, the income tax consequences will depend on the facts of each particular situation which can only be determined on a case by case basis. Therefore while we hope that our comments are of assistance to you, as indicated in paragraph 22 of IC-70-6R3, this opinion is not a ruling and accordingly, it is not binding on Revenue Canada.
Yours truly,
F. Lee Workman
Manager
Financial Institutions Section
Financial Industries Division
Income Tax Rulings and
Interpretations Directorate
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