21 June 1988 Income Tax Severed Letter

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.

JUN 21 1988

Specialty Rulings Directorate Foreign Section N.R. Mitchell 957-2134

SUBJECT: OBJET: Disposition of a Life Insurance Policy in Canada by a Non-Resident

FILE DOSSIER

This is in reply to your memorandum of March 14, 1988. You are concerned that a non-resident whose only income in Canada was derived from the disposition of a life insurance policy in Canada would not be taxable under the income Tax Act.

We agree that a life insurance policy does not fall within the category of "taxable Canadian property" as defined in paragraph 115(1)(b) and as extended in subsection 248(1), on the assumption that subparagraph 115(1)(b)(ii.1) is not applicable. Consequently, we agree that the disposition of a life insurance policy in Canada by a non-resident would not, in and of itself, bring that person within the relevant charging provision - subsection 2(3) - such that the person's income would be required to be calculated in accordance with Division D in general and subsection 115(1) in particular. Under the latter provision, specifically subparagraph 115(l)(a)(vi), an income inclusion in the amount that would be arrived at pursuant to subsections 148(1) or (1.1) if the person had been resident in Canada throughout the year is required to be made. That calculation and inclusion cannot be made unless the person is first brought within the charging provision of subsection 2(3) by meeting the requirements of any of paragraphs 2(3)(a), (b) or (c).

It follows that the Department might wish to issue a non-resident in the above circumstances with a certificate under subsection 116(5.2), without security, provided it can be demonstrated that the non-resident person will not receive any other Canadian source income for the year and does not and never has in any previous year met the conditions described in paragraphs 2(3)(a), (b) or (c). We note in this regard that the postamble to subsection 2(3) would bring within the relevant charging provision a person who as (a) employed in Canada, (b) carried on business in Canada, or (c) disposed of taxable Canadian property at any time in the year or in a previous taxation year. The expression "in a previous year" would, notwithstanding the rather narrow explanation set out in paragraph 2 of IT-171R , cast a very broad net. As we read it, the charging provision is triggered for all subsequent years if a person has done any of the things described in paragraphs 2(3)(a), (b) or (c) in any previous year. While the provision would perhaps be clearer if the words "any previous year." had indeed been used, it is our view that the use of the indefinite article "a" in this context has the same effect. A comparison with other similar provisions in the Act suggests that if any other meaning was intended, rather different wording would have been employed, e.g. "the (immediately) preceding year."

Accordingly, we would suggest that while the problem you have identified is a theoretical possibility, it is unlikely to be a serious practical concern. It would seem likely that the great majority of persons who dispose of a life insurance policy in Canada would have or would at some point in a previous year have had an employment, business or property connection with Canada - that would bring them within subsection 2(3). Indeed, it would seem rather strange that a person who did not at some time have such a connection with Canada would acquire a life insurance policy in Canada to which subparagraph 115(l)(a)(vi) and subsections 116(5.1), (5.2) and (5.3) could apply in the first place. While there may be exceptions to this general view, such as the case of an insurance policy purchased for a child of an individual who worked in Canada only temporarily at some time in the past, we do not believe these could be other than rare, isolated cases. As such, we do not believe the technical problem or anomaly you have identified would justify any action on the part of the Department or a technical amendment to the Act. Nonetheless, we will bring this issue to the attention of Provincial and International Relations Division. If you are aware of any particular cases of abuse or untaxed income, please advise us.

Yours truly,

Small Business and General Division Specialty Rulings Directorate Legislative and Intergovernmental Affairs Branch

c.c. R. D'Aurelio Provincial and International Relations Division