11 July 1989 Ministerial Correspondence 58204 F - Transfer of Ownership of 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.

July 11, 1989

Dear Sirs:

Re:  Transfer of Ownership

This is in reply of your letter of may 23, 1989 concerning the tax implications of a change of ownership of a life insurance policy with an additional life benefit.  You have asked us to comment on two hypothetical situations.

In the first situation, the sole ownership of a policy is being transferred form the husband who is the basic life insured to his wife who is the additional life insured.  You have asked whether subsection 148(7) or 148(8) of the Income Tax Act (Canada) (the "Act") would apply to the transfer of ownership.  All references to statute are to the Act.

Subsection 148(1) requires that the proceeds of disposition of an interest in a life insurance policy which a policy holder becomes entitled to receive in a year must be included in income to the extent that hey exceed the adjusted cost basis to the policyholder of that interest in the policy immediately before its disposition. Subsection 148(7) provides in part that where an interest of a policyholder in a life insurance policy is disposed by way of gift during his lifetime to any person with whom the policyholder was not dealing at arm's length, the policyholder is deemed to become entitled to receive proceeds of the disposition equal to the value of the interest at the time of the disposition and the person who acquires the interest by virtue of the disposition shall be deemed to acquire it at a cost equal to such value.  Paragraph 148(9)(g) defines "value" for this purpose to be the cash surrender value where the interest transferred includes an interest in the cash surrender value.  Where there is no cash surrender value transferred, it deems the value to be nil.

Subsection 148(8) makes limited provision for the rollover of an interest in a life insurance policy at its adjusted cost basis.  The transferee or a child of either the policyholder or the transferee has to be the person whose life is insured.  These words suggest that there can be only one life insured under the policy in order to have a tax free rollover. In the case which you have described, the husband has transferred his interest in a life insurance policy to his wife, thus meeting the condition of subparagraph 148(8)(a)(i).  However, as the wife is not the life insured under the policy, the condition in paragraph 148(8)(b) is not met and a rollover of the interest in the policy at its adjusted cost basis cannot be made.  Generally, pursuant to subsection 148(7), proceeds of disposition equal to the value of the interest in the policy will be deemed t have been received by the husband in the situation you described.

In the second situation, the husband, who is the basic life insured of a policy, transfers fifty percent of his interest in the policy to his wife who is the additional life insured.  As the wife is not the life insured under the policy, the provisions of subsection 148(8) will not apply.  Instead, the husband will be deemed to have received proceeds equal to the value of the interest in the policy transferred to his spouse.  The adjusted cost basis to the husband of such interest will be determined in accordance with subsection 148(4).

While we hope that our comments are of assistance to you, they do not constitute an advance income tax ruling and therefore are not binding on the Department in respect of a specific situation.

Yours truly,

for DirectorFinancial Industries DivisionRulings Directorate