19 January 1999 External T.I. E9826715 - 148(8) - TRANSFER TO A MINOR CHILD

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:

Rollover of an interest in a life insurance policy to a minor child under subsection 148(8). If the child is a minor the child under most provincial statutes may not have the legal capacity to own or deal with an insurance policy (except as a beneficiary). In these cases will a transfer of the policy to a bare trust satisfy the conditions of subsection 148(8)?

Position: No.

Reasons:

Since a transfer must be directly to the child of the policyholder a transfer to a trust of which the child is the sole beneficiary would not qualify. A transfer to a bare trust would not constitute a transfer to the child. Moreover, a transfer to a minor child may not be void under the law but merely voidable such that direct transfers still appears to be possible. The determination of this matter is ultimately a question of law.

XXXXXXXXXX 					982671

Attention: XXXXXXXXXX

January 19, 1999

Dear Sirs:

We are writing in reply to your letter dated October 7, 1998, concerning the application of subsection 148(8) of the Income Tax Act (the "Act") to a transfer of a policyholder’s interest in a life insurance policy.

In your letter you indicate that subsection 148(8) of the Act provides for a tax free rollover on the disposition of a policyholder’s interest in a life insurance policy where, inter alia:

(a) the policyholder’s interest in such a policy is transferred to the policyholder’s child for no consideration, and

(b) a child of the policyholder or a child of the transferee is the person whose life is insured under the policy.

Where the above conditions are met the policyholder will be deemed to have disposed of his/her interest in the policy for proceeds of disposition equal to his/her adjusted cost basis in the policy and the transferee will be deemed to have acquired their interest in the policy for a cost basis equal to those same deemed proceeds.

You indicated that it is your understanding that under most provincial insurance laws (such as Ontario) a minor has no legal capacity to own or deal with an insurance policy (except as a beneficiary). As a result you are concerned that it may not be legally possible for a policyholder to transfer his/her interest in a life insurance policy directly to a minor child and ask whether it would be possible in such cases for the transfer be made to a “bare trust” and still have subsection 148(8) of the Act apply?

Our Comments

It is not possible for a policyholder to transfer their interest in a life insurance policy (that otherwise meets the conditions of subsection 148(8) of the Act) to any type of trust under subsection 148(8) of the Act. This is the case even if a policyholder transferred his/her interest in a life insurance policy (that otherwise met all the other conditions of subsection 148(8) of the Act) to a trust established solely for the benefit of his/her minor child since the transfer would not have been made to the child of the policyholder as required by subsection 148(8) of the Act. However, such a transfer may qualify under subsection 148(7) of the Act assuming all the other conditions of that subsection are met.

We would also like to point out that it is not possible for a policyholder to transfer its interest in a life insurance policy to a bare trust and have either of subsections 148(7) or (8) of the Act apply. The Department generally views a bare trust to exist under common law where:

(a) the trustee has no significant powers or responsibilities, and can take no action without instructions from the settlor;

(b) the trustee's only function is to hold legal title to the property; and

(c) the settlor is the sole beneficiary and can cause the property to revert to him or her at any time.

The determination as to whether a bare trust exists or not is a question of fact. Under a bare trust arrangement the transferor/settlor of the trust (i.e., the policyholder) must, inter alia, also be the sole beneficiary of the trust. As a consequence under a bare trust arrangement there would be no disposition of the policy to the child (or any other person) for the purposes of subsection 148(8) or subsection 148(7) of the Act. Where the beneficiary of the trust is someone other than the policyholder (e.g., the minor) this arrangement would not be considered a bare trust and subsection 148(8) of the Act will have no application as noted earlier in our response.

While we understand the reason for your concern, we are aware that it may be possible to use a successive owner designation provision under provincial insurance laws (such as subsection 199(1) of the OIA for example) to acheive a transfer of a policy to a minor child under subsection 148(8) of the Act. Moreover, it is not entirely clear to us that a direct transfer (by way of gift) of an interest in a life insurance policy to a minor child would automatically result in the policy itself being considered void, or in the transfer to the minor being considered void (see for example sections 178 and 179 of the OIA). However, the legal consequences of such actions remains a question of law that can only be determined where we have been provided with all the relevant facts and information of a particular situation (including a complete analysis of the relevant provincial laws involved).

In this regard if you have a specific proposed transaction you may seek our views by making an advance income tax ruling on this matter in the manner set out in Information Circular 70-6R3 dated December 30, 1996 (IC-70-6R3). 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.

While we trust that our comments will be 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,

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

.../cont'd