28 June 1999 External T.I. 9917195 - LIFE INSURANCE POLICY EXEMPT 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: Whether or not a life insurance policy issued by a non-resident insurer can qualify as an exempt policy.

Position: Generally not.

Reasons: The determination is incumbent on the policyholder and when the policy is issued by a non-resident insurer the required information is usually not available.

XXXXXXXXXX 991719

June 28, 1999

Dear XXXXXXXXXX:

Re: Product issued by a foreign insurance company

This is in reply to your letter of June 14, 1999 wherein you requested an advance income tax ruling with respect to some potential life insurance products and the application of section 306 of the Income Tax Regulations.

Where you are proposing to purchase a particular product from a foreign insurance company you may request an advance income tax ruling in accordance with the Department's requirements as set forth in Information Circular 70-6R3 dated December 30, 1996 a copy of which is attached for your information. You will note in paragraph 5 of this circular that there is a $90.00 fee for each hour or part thereof spent on the ruling request and that an advance payment equal to five hours of work plus GST ($481.50) is required. This prepayment is applied against the amount charged for the advance income tax ruling.

The determination of whether or not a particular product issued by a foreign insurance company constitutes a life insurance policy for purposes of the Income Tax Act ("Act") is a question of law which can only be made after a formal review of this product.

Under subsection 148(1) of the Act, a policyholder is required to include in income in respect of the disposition of an interest in a life insurance policy an amount by which the proceeds of the disposition of the policyholder's interest in the policy that the policyholder, the beneficiary or assignee is entitled to receive exceeds the policyholder's "adjusted cost basis", as defined in subsection 148(9) of the Act, of that interest immediately before the disposition. A "disposition" is defined for the purposes of section 148 of the Act in subsection 148(9) of the Act to include and exclude certain transactions and events. By virtue of paragraph (j) of that definition, a disposition does not include a payment in consequence of the death of any person whose life was insured under an exempt policy or a life insurance policy that was last acquired before December 2, 1982. Therefore, if the life insured under an exempt policy dies, the termination of the policy is not a disposition. Accordingly, subsection 148(1) of the Act would not have application and therefore no amount would be included in the policyholder's income in respect of the death benefit received by the beneficiary.

A life insurance policy, which may be acquired from a non-resident insurer which is not carrying on an insurance business in Canada, is not specifically precluded from qualifying as an "exempt policy". It is our view that such a policy could qualify provided the criteria in section 306 of the Regulations were satisfied. While there are no special rules for dealing with this type of situation it would be incumbent on the policyholder to demonstrate that the policy so qualifies. This would include the provision of evidence to the Department that the life insurance policy satisfied the exempt policy tests in section 306 of the Regulations on the date of the first policy anniversary and continuously thereafter. It is our view that generally policies issued by insurers not carrying on a life insurance business in Canada will not be able to satisfy the requirements necessary to qualify as exempt policies.

The foreign property reporting rules can be found in section 233.3 of the Act. A "specified foreign property" is defined in subsection 233.3(1) of the Act and could include, where applicable, a taxpayer's interest in a life insurance policy issued by a non-resident insurer.

While we trust that the foregoing may be of assistance they are not binding upon the Department.

Yours truly,

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