4 October 2001 External T.I. 2001-0100135 - UK ENDOWMENT

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 treatment of a U.K. endowment policy acquired by a non-resident individual when the individual later immigrates to Canada.

Position: General comments

Reasons: Insufficient information.

XXXXXXXXXX 							2001-010013

October 4, 2001

Dear XXXXXXXXXX:

Re. U.K. Endowment Policy

This is in reply to your letter of August 25, 2001 wherein you requested our views with respect to the income tax treatment of a U.K. endowment assurance plan.

The particular circumstances described in your letter relates to a factual situation involving a specific taxpayer. As explained in Information Circular 70-6R4 dated January 29, 2001, with respect to transactions involving completed transactions, you may submit all relevant facts and documentation to the appropriate Tax Services Office for their views. However, we can offer the following general comments which may be of assistance.

When an individual immigrates to Canada and becomes a Canadian resident, subsection 128.1(1) of the Income Tax Act (the "Act") generally deems that individual to have disposed of each property owned by him or her immediately before that time for proceeds of disposition equal to the fair market value of the particular property at that time and to have reacquired each such property so disposed of for a cost equal to the amount of the deemed proceeds. 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 a U.K. endowment assurance plan would constitute a life insurance policy within the meaning of subsection 138(12) of the Act, which 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, it may be suggestive that it could be considered a life insurance policy for the purposes of the Act. If a product does constitute a life insurance policy, 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 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, a copy of which is enclosed, 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.

We hope that our comments will be of assistance.

Yours truly,

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