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 are the tax implications when a non-resident disposes of an interest in a life insurance policy that is not a "life insurance policy in Canada" as that term is defined in subsection 138(12) of the Income Tax Act.
Position: Only general comments provided.
Reasons: Subparagraph 115(1)(a)(vi) is applicable only if the policy is a "life insurance policy in Canada". When the policy is not a "life insurance policy in Canada" the tax implications can only be determined after a review of the terms and conditions of the particular life insurance policy.
April 13, 2010
Dear XXXXXXXXXX :
Re: Disposition of a Life Insurance Policy by a Non-resident
This is in response to your facsimile of September 23, 2006, wherein you requested confirmation that no taxable income arises when a non-resident individual disposes of an interest in a life insurance policy that is not a "life insurance policy in Canada" as defined in subsection 138(12) of the Income Tax Act (the "Act").
You asked us to consider a scenario where a Canadian life insurance company issues a life insurance policy on the life of a non-resident individual. The life insurance policy is not an annuity and is not subject to annual accrual taxation under section 12.2 of the Act. You note that such a policy will not be a life insurance policy in Canada. When the non-resident policyholder surrenders the policy, it is your view that subparagraph 115(1)(a)(vi) of the Act will not apply to the policy since the provision specifically refers to a life insurance policy in Canada.
It is not this Directorate's practice to comment on proposed transactions involving specific taxpayers other than in the form of an advance income tax ruling. For more information about how to obtain a ruling, please refer to Information Circular 70-6R5, Advance Income Tax Rulings, dated May 17, 2002. This Information Circular and other Canada Revenue Agency ("CRA") publications can be accessed on the internet at http://www.cra-arc.gc.ca. Should your situation involve a completed transaction, you should submit all relevant facts and documentation to the appropriate Tax Services Office for their views. We are, however, prepared to provide the following general comments.
Pursuant to paragraph 2(3)(c) of the Act, a non-resident of Canada who has disposed of a taxable Canadian property ("TCP") in a taxation year is subject to tax on the non-resident's taxable income earned in Canada for the year as determined in accordance with Division D of Part I of the Act.
TCP is defined in subsection 248(1) of the Act and for the limited purposes of section 2, subsection 107(2.001) and sections 128.1 and 150 of the Act, and for the purpose of applying paragraphs 85(1)(i) and 97(2)(c) of the Act to a disposition by a non-resident person, it includes a life insurance policy in Canada.
Subsection 248(1) of the Act defines a "life insurance policy in Canada" to have the meaning assigned by subsection 138(12) of the Act. Subsection 138(12) of the Act defines a "life insurance policy" to mean a life insurance policy issued or effected by an insurer upon the life of a person resident in Canada at the time the policy was issued or effected.
In general, where a non-resident of Canada disposes of his or her interest in a life insurance policy in Canada, the income arising on such disposition is computed in accordance with subparagraph 115(1)(a)(vi) and subsection 148(1) of the Act. As you have noted, where the policy is not a life insurance policy in Canada, subparagraph 115(1)(a)(vi) of the Act will not apply to such a policy. In terms of whether, in such circumstances, no taxable income will arise for the purposes of other provisions of the Act, that is a question of fact which can only be determined after a review of the terms and conditions of the particular life insurance policy.
For instance, we note that an interest in a segregated fund policy issued by a Canadian resident insurer may be TCP in circumstances where the policy is not a life insurance policy in Canada. An interest in a segregated fund policy is deemed to be an interest in an inter vivos trust for the purposes of Part XIII and Part I of the Act. The definition of TCP in subsection 248(1) of the Act includes property of a taxpayer that is a capital interest in a trust resident in Canada (other than a unit in a unit trust that is a mutual fund trust). If an interest in a segregated fund policy constitutes TCP, section 115 of the Act could potentially apply.
We trust these comments are of assistance. However, as stated in paragraph 22 of Information Circular 70-6R5, the above comments do not constitute an advance income tax ruling and accordingly are not binding on the CRA in respect of any particular situation.
Ontario Corporate Tax Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch
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