8 May 2012 Roundtable, 2012-0444711C6 - 2012 CALU Roundtable - Question 12

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.

Principal Issues: What is the expectation of the CRA for policyholders in determining the ACB of a foreign insurance policy?

Position: The CRA would expect that the determination of the “cost amount” of a “specified foreign property” is made on the basis of all the information that can reasonably be obtained in a given situation.

CALU CRA Roundtable – May 2012

Question 12 – Foreign investment reporting and life insurance policies issued by foreign insurers

Background

In the 2010 APFF Round Table on Taxation of Financial Strategies and Instruments, the CRA confirmed that a life insurance policy issued by a foreign insurer meets the definition of “specified foreign property” under section 233.3 of the Act. Consequently, a Canadian entity holding an interest in a life insurance policy issued by a foreign insurer with a cost amount exceeding $100,000 would be required to comply with the reporting requirements of section 233.3 of the Act.

At the 2011 APFF Round Table on Taxation of Financial Strategies and Instruments (Question 1) there was a follow-up question on whether the cost amount of an interest in a life insurance policy is the adjusted cost basis (“ACB”) as defined in subsection 148(9) of the Act, or whether it is the premiums paid.

CRA Response at 2011 APFF Round Table

A “reporting entity” for a taxation year must file a form T1135, Foreign Income Verification Statement, within the prescribed time period pursuant to subsection 233.3(3) ITA. A “specified Canadian entity” is considered a “reporting entity” for a taxation year or fiscal period where, at any time (other than a time when the entity is non-resident) in the year or period, the total of all amounts each of which is the cost amount to the entity of a “specified foreign property” of the entity exceeds $100,000, in accordance with the definitions of these terms found in subsection 233.3(1) ITA.

The “cost amount” of the interest an owner holds in a life insurance policy at any given time will generally be determined in accordance with paragraph (f) of the definition of that term set out in subsection 248(1) ITA. Thus, it is the cost to the taxpayer of the property as determined for the purpose of computing the taxpayer’s income, except to the extent that that cost has been deducted in computing the taxpayer’s income for any taxation year ending before that time.

The term “cost” is not defined within the ITA. Furthermore, determination of the cost of property for the purpose of computing a taxpayer’s income calls for an analysis of all the facts relevant to a particular situation. We are of the opinion, however, that the “adjusted cost basis” of the interest an owner holds in a life insurance policy, as defined in subsection 148(9) ITA, can generally be considered a reasonable valuation of the cost of the property for the purposes of the application of the rules set out in section 233.3 ITA.

Question

While the CRA’s response provides some certainty to owners of foreign issued insurance policies, it still leaves the taxpayer with the very practical problem of determining the ACB of the policy. It is highly unlikely that a foreign insurer will be able to provide this information given the fact that certain elements of the ACB calculation (such as the annual net cost of pure insurance) are based on Canadian income tax rules. Could the CRA confirm their expectation of policyholders in determining the ACB of a foreign insurance policy? For example, would the CRA be satisfied with the policyholder making “best efforts” to determine the ACB of the policy by reviewing his or her own records and contacting the foreign insurer for additional information?

CRA Response

The CRA would expect that the determination of the “cost amount” of a “specified foreign property” is made on the basis of all the information that can reasonably be obtained in a given situation. This would be a question of fact after a thorough review of the circumstances.

Michel Gauthier
2012-044471
May 8, 2012