2 October 2003 External T.I. 2003-0027185 - US Life Insurance 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 CCRA.

Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ADRC.

Principal Issues: Tax implications for Canadian citizen non-resident acquiring a U.S. life insurance policy and then returning to Canada.

Position: General comments given.

Reasons: n/a

XXXXXXXXXX 	2003-002718
		Eliza Erskine
October 2, 2003

Dear XXXXXXXXXX:

Re: Canadian Citizen Acquiring a U.S. Life Insurance Policy

This is in reply to your facsimile received in our Directorate on July 2, 2003, requesting information with respect to the Canadian tax implications of a Canadian citizen resident in the United States¹ acquiring whole life insurance in the United States and subsequently returning to Canada.

Our Comments

The circumstances outlined in your letter relate to a specific transaction involving a particular taxpayer. We note that written confirmation of the tax implications arising out of a particular fact situation are given by this Directorate only where the circumstances or events are the subject matter of an advance income tax ruling request. Please consult the current version of Information Circular IC 70-6, Advance Income Tax Rulings, which can be found on the Canada Customs and Revenue Agency website at www.ccra-adrc.gc.ca for information regarding obtaining an advance income tax ruling. There is a fee for obtaining an advance income tax ruling. Our Directorate also provides non-binding technical interpretations at no charge with respect to hypothetical scenarios. We do not provide information in the nature of tax advice or tax consultation, however. As a result, we cannot give you a detailed response to your question, and we advise you to consult with a Canadian tax professional. We can offer the following general comments, however, which may be helpful to you.

As you may be aware, Canada imposes tax on the basis of residence, not citizenship. Generally, if you are a resident of Canada, then you are subject to tax in Canada on all of your income from whatever source. For a detailed discussion of how residence status is determined for Canadian tax purposes, please refer to Interpretation Bulletin IT-221R3, Determination of an Individual's Residence Status ("IT-221R3") which can be obtained from our website at www.ccra-adrc.gc.ca under income tax technical publications.

We understand that your client has previously been a resident of Canada, however, the tax rules applicable on immigrating to Canada are generally the same for returning Canadians as for individuals who have never resided in Canada. In particular, individuals immigrating to Canada are subject to paragraph 128.1(1)(b) of the Income Tax Act (the "Act"), which provides that, for purposes of the Act, an individual is deemed to dispose of all of the individual's property (with certain exceptions generally relating to specific types of property located in Canada), for fair market value prior to entering Canada. The property subject to the deemed disposition is then deemed to be reacquired by the individual for a cost equal to the proceeds of disposition from the deemed disposition. Very generally, the effect of this is that, for purposes of computing Canadian tax, an individual who becomes resident in Canada will have a cost base for most of his or her property that is equal to the fair market value of the property upon entering Canada. The intended effect of these rules is not to tax gains which accrued prior to immigration.

Based on the limited information provided, it appears that the type of insurance policy your client is proposing to purchase would constitute a life insurance policy within the meaning of subsection 138(12) of the Act, although this is generally a question of fact and law. While not necessarily conclusive, where a product provides for a death benefit or constitutes an annuity arrangement, this suggests that it could be considered a life insurance policy for the purposes of the Act. If a product does constitute a life insurance policy for purposes of the Act, it is possible that where there is a specific allocation of assets provided for it, the product would constitute a segregated fund policy to which the rules in section 138.1 of the Act apply.

Where subsection 128.1(1) of the Act is applicable, a policyholder will be deemed to have "last acquired" the policy at the time the policyholder became resident in Canada for the purposes of subsection 12.2(1) of the Act. Pursuant to subsection 12.2(1) of the Act, the accrued income under a non-exempt life insurance policy last acquired after 1989 is generally taxed on an annual basis. The amount of the accrual is based on the excess of the policy's "accumulating fund" (as defined in section 307 of the Income Tax Regulations) each year, over its "adjusted cost basis", as defined in subsection 148(9) of the Act. The accumulating fund is essentially a measure of the accumulating investment growth or build-up over time. The adjusted cost basis is essentially the cost of the policy adjusted for certain items such as premiums paid under the policy and any amount of accrued income previously included in computing the policyholder's income.

In addition, 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 the assignee is entitled to receive exceeds the policyholder's adjusted cost basis of that interest immediately before the disposition. Subsection 148(9) provides that a disposition will occur in respect of a life insurance policy upon the dissolution of the interest by virtue of the maturity of the policy. As discussed in Interpretation Bulletin IT-87R2, Policyholders' Income from Life Insurance Policies, which can be obtained from our website at www.ccra-adrc.gc.ca under income tax technical publications, the determination of the accumulating fund and the adjusted cost basis of a policy generally requires information that is available only in the accounts of the issuer.

At the end of your facsimile you request that we provide "printed legal material concerning the tax laws." We assume that you refer to the provisions of the Act and Regulations that apply to your client's situation. We generally do not provide printed copies of Canada's statutes however we suggest that, in addition to reviewing our information circulars and interpretation bulletins referred to above, you may wish to go to the following website, which provides links to the full text of Canada's statutes and regulations: http://laws.justice.gc.ca/en/index.html (this site is maintained by Canada's Department of Justice). On this website there is a direct link to the full text of the Act among the statutes listed under both "Major Statutes" and "Frequently Accessed Statutes". If you wish to review the Regulations, then please change the search criteria immediately under "Basic Search" to "Consolidated Regulations" and use "income tax" as your search text.

We hope that our comments will be of assistance. If you have any difficulty obtaining the documents referred to above, or if you have specific questions regarding tax filing requirements for individuals returning to (entering) Canada, please contact the International Tax Services Office, Enquiries and Adjustments Division at 1-800-267-5177. Again, we would advise you or your client to discuss this matter with a Canadian tax advisor if you require specific advice or information relating to your client's particular fact situation.

Yours truly,

Jim Wilson
for Director
International and Trusts Division
Income Tax Rulings Directorate

ENDNOTES

¹ Your facsimile does not specifically say that your client is resident in the United States, however, we have assumed from your reference to a "green card" and the context of your facsimile that your client is in fact currently resident in the United States. As noted in our comments, residence status is a question of fact to be determined with regard to all the circumstances of the taxpayer at the particular time.

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