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. Whether certain changes made to a life insurance policy after April 26, 1995 will affect the application of the grandfathering provisions to the stop-loss rules in subsection 112(3).
2. Whether a change in the ownership and the beneficiary of a life insurance policy after April 26, 1995 will affect the application of the grandfathering provisions.
3. Whether a rollover under section 85 has any impact on the application of the grandfathering provisions.
Position:
1. Not necessarily.
2. No, provided that the conditions set out in paragraph 131(1)(b) of S.C. 1998, c.19 relating to the life insurance policy are otherwise met.
3. No.
Reasons:
1. Where the conditions set out in paragraph 131(1)(b) of S.C. 1998, c. 19 relating to the life insurance policy existed on April 26, 1995, it is our view that any further modications or alterations or cancellation of the policy would not, in and of themselves, result in the loss of grandfathering.
2. See above.
3. By virtue of the deeming rule in subsection 131(12) of S.C. 1998, c. 19, a section 85 rollover will not adversely affect the application of the grandfathering provisions.
XXXXXXXXXX 991617
Attention: XXXXXXXXXX
July 13, 1999
Dear Sirs:
Re: Stop-Loss Rules - Grandfathering Provisions
This is in reply to your letter dated June 4, 1999, concerning the application of the grandfathering provisions to the stop-loss rules in subsection 112(3) of the Income Tax Act (the "Act") to a situation where Opco is the policyholder and beneficiary of a life insurance policy on the life of Mr. A and Mr. A has transferred all of the shares he owned directly in Opco to Holdco pursuant to section 85 of the Act.
Your request appears to relate to either a proposed or completed situation involving specific taxpayers. Confirmation with respect to proposed transactions involving specific taxpayers will only be provided in response to a request for an advance income tax ruling. The procedures for requesting an advance income tax ruling are outlined in Information Circular 70-6R3. Questions concerning the proper determination of the income tax consequences of a completed transaction should be addressed to the appropriate local tax services office. However, we are prepared to provide the following general comments which are not binding on the Department.
As indicated in Income Tax Technical Newsletter dated February 11, 1998, to qualify for the grandfathering provisions, a taxpayer must demonstrate that certain conditions related to a life insurance policy existed on April 26, 1995. It is possible that subsequent actions in respect of the policy may be relevant in determining whether the conditions (i.e., the main purpose test) set out in the grandfathering provisions under paragraph 131(1)(b) of S.C. 1998, c.19 existed on April 26, 1995. However, it is our view that any further modifications or alterations or cancellation of such a policy would not, in and of themselves, result in the loss of grandfathering. Accordingly, changes such as converting the existing policy to a universal life policy, replacing the existing policy with a new life insurance policy, or increasing the amount of life insurance either by increasing the death benefit payable under the existing policy or adding a new life insurance policy with additional death benefit would not necessarily preclude the grandfathering provisions from continuing to apply if the conditions outlined in paragraph 131(1)(b) of S.C. 1998, c. 19 existed on April 26, 1995.
We note that the transfer of ownership of a life insurance policy by a corporation to another corporation with that other corporation becoming the beneficiary of the policy would not eliminate the application of the grandfathering provisions if the conditions set out in paragraph 131(1)(b) of S.C. 1998, c. 19 are otherwise met. Whether or not such conditions are met is a question of fact. However, if the other corporation becomes the beneficiary of the policy without also becoming the policyholder of the policy, the result would, in our view, be contrary to intent of paragraph (d) of the definition of "capital dividend account" in subsection 89(1) of the Act which is that the amount of the proceeds of a life insurance policy to be included in the capital dividend account be reduced by the adjusted cost basis, within the meaning assigned by subsection 148(9) of the Act, of the policy. Accordingly, unless there are bona fide reasons, other than to obtain a tax benefit, for switching the beneficiary of the policy without transferring the ownership of the policy, it is our opinion that there may be a reasonable argument for applying subsection 245(2) of the Act to reduce the amount of the life insurance proceeds to be included by the other corporation in its capital dividend account by the adjusted cost basis of the policy.
Finally, subsection 131(12) of S.C. 1998, c. 19 applies to deem a share of a corporation acquired by a taxpayer in exchange for another share on a rollover under section 85 of the Act to be the same share as the other share for the purposes of paragraph 131(1)(b) of S.C. 1998, c. 19. As a result, it is our view that a rollover of shares under section 85 of the Act will not adversely affect the application of the grandfathering provisions if the conditions set out in paragraph 131(1)(b) of S.C. 1998, c. 19 relating to the life insurance policy existed on April 26, 1995.
We trust that these comments will be of assistance.
Yours truly,
Manager
Financial Institutions Section
Financial Industries Division
Income Tax Rulings and
Interpretations Directorate
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