26 January 2001 External T.I. 2000-0021175 - Variation Multiple 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 Department.

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

Principal Issues: A hypothetical universal life policy providing for multi-life coverage specifically provides for the addition of life insureds. The policy is owned by an individual, H, and provides for individual coverage of $100,000 on each of H and his wife, W. If the policy is amended to add $100,000 of coverage on a joint last to die basis and to drop the individual coverages, is there a disposition for the purposes of section 148 of the Act? Does paragraph 148(10)(d) apply by virtue of the provision providing for the addition of lives? Would it be relevant if the policy contained a provision permitting the substitution of lives insured?

Position: It is a question of fact whether or not changes to a particular policy are sufficiently material to cause a surrender of an interest in that policy and the acquisition of an interest in a new policy. This determination can only be made on a case by case basis, having regard to all the provisions of the policy. In this case, it would not be relevant whether or not the policy contained a provision allowing the addition of lives insured or the substitution of lives insured.

Reasons: The CCRA's view is that a change in the lives insured under a policy would be a sufficiently material change to cause a surrender of an interest in that policy and the acquisition of an interest in a new policy. However, the CCRA considers joint last to die coverage to be insurance in respect of each of the lives subject to the joint coverage. Thus, the addition of joint last to die coverage to a policy providing for multi-life coverage on the same individuals would not constitute the addition of a life insured. For this reason, in this case a provision in the policy providing for the addition or for the substitution of lives would not be relevant in assessing whether or not the change was sufficiently material to cause a disposition for the purposes of section 148.

XXXXXXXXXX R. Maley
2000-002117
January 26, 2001

Dear XXXXXXXXXX:

Re: Change from Multiple Life Insurance to Joint Last to Die

This is in response to your letter of April 18, 2000 asking for our views on the application of section 148 of the Income Tax Act in circumstances where joint last to die coverage is added to a universal life policy with multiple life coverage.

In your letter, you describe a hypothetical universal life policy providing for multi-life coverage and for the addition or one or more life insureds after the issue of the policy. The policy was issued with husband (H) covered for $100,000 of death benefit and wife (W) covered for $100,000 of death benefit. H is the owner of the policy. H would like to change the terms of the policy to add $100,000 coverage on himself and on W on a joint and last survivor basis. You suggest that this change be made pursuant to the contractual right in the policy to add one or more life insureds. After the joint last to die coverage is issued, H will drop the individual coverages on H and on W. You have requested our views as to whether a disposition will occur under section 148 of the Act and specifically, whether paragraph 148(10)(d) would apply. In this respect, you have also asked for confirmation that the exempt test would continue to be based upon the original issue date of the contract.

We are unable to provide any definitive comments on the tax implications of the proposed change to the policy described, as the question of whether or not the change in question constitutes a disposition is one that can be answered only after reviewing

the particular contract and other surrounding facts. If you have a particular policy and policyholder, you may wish to consider obtaining an advance income tax ruling. Reference may be had to Information Circular 70-6R3 in this regard. However, we are prepared to offer the following general comments which may be of assistance.

Where a policyholder under a life insurance policy has disposed of an interest in the policy in the year, subsection 148(1) generally requires the policyholder to include, in computing income for the year, the amount by which the proceeds of disposition in respect of that interest exceeds its adjusted cost base. A disposition for this purpose is defined in paragraph 148(9)(a) to include a surrender of an interest in the policy.

Subsection 148(10) provides that a policyholder shall not be deemed to have disposed of or acquired an interest in a life insurance policy as a result only of the exercise of any provision of the policy other than the conversion of the policy into an annuity contract.

Where a policy is silent with respect to a particular type of change, the amending of the policy, if a material change, could result in a disposition of the existing policy and the acquisition of a new policy at law. It is a question of fact whether particular changes to the terms and conditions of a life insurance policy are so fundamental as to result in a surrender of the policy and the acquisition of a new policy. Such a determination can only be made on a case by case basis and the Canada Customs and Revenue Agency (CCRA) has no general guidelines as such.

The CCRA is of the view that a change in the life insured under a policy is a sufficiently material change to result in a surrender of the original policy and the issuance of a new policy. However, the CCRA generally would not view the insurance of individuals on a joint last to die basis as insurance of a different life or lives than insurance of the same persons on an individual basis, such as that described in your hypothetical policy. That being the case, the fact that the policy contained a contractual right to add lives would not be relevant in determining whether or not the addition of joint last to die coverage to that policy was a sufficiently material change to cause a surrender of the policy. Similarly, a contractual right to substitute life insureds would not be relevant in determining whether or not the change to the policy was sufficiently material to cause a surrender of the policy.

While the foregoing comments are not binding on the CCRA, we trust that they assist.

F. Lee Workman
Manager
Financial Institutions
Financial Industries Division
Income Tax Rulings Directorate