27 January 2025 External T.I. 2024-1018491E5 - U.K. Endowment 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.

Principal Issues: Tax treatment of UK endowment policy acquired by a non-resident individual, and the individual later immigrates to Canada.

Position: Provided general comments.

Reasons: Unable to provide a definitive response due to insufficient information. When a policy is issued by a non-resident insurer, the required information to determine the tax implications is usually not readily available.

XXXXXXXXXX									2024-101849
										Karri Lea Estabrooks

January 27, 2025

Dear XXXXXXXXXX:

Re: Tax treatment of United Kingdom endowment policy

We are writing in reply to your letter of May 12, 2024, wherein you requested clarification of the Canadian tax treatment of a United Kingdom (UK) Mortgage Endowment Policy (Policy). Briefly, you acquired the Policy acquired in 1998 as an investment plan with a life insurance component, while you were a non-resident of Canada. The Policy matured in 2023 and you received a lump-sum amount from the Policy issuer, while you were a resident of Canada. You also indicated that the Policy was issued to you prior to your marriage and ask whether any income arising therefrom can be reported by your spouse. We apologize for the delay in our response.

Our Comments

This technical interpretation provides general comments about the provisions of the Income Tax Act (Act) and related legislation (where referenced). It does not confirm the income tax treatment of a particular situation involving a specific taxpayer but is intended to assist you in making that determination. The income tax treatment of particular transactions proposed by a specific taxpayer will only be confirmed by this Directorate in the context of an advance income tax ruling request submitted in the manner set out in Information Circular IC 70-6R12, Advance Income Tax Rulings and Technical Interpretations.

Life insurance policy

The term “life insurance policy” is broadly defined in subsection 138(12) of the Act and whether a particular product is a life insurance policy is generally a question of fact. While not necessarily conclusive, where a particular product provides for a death benefit or constitutes an annuity arrangement, it may be suggestive that the product could be a life insurance policy. We have previously opined that a UK endowment policy would appear to be a life insurance policy within the meaning in subsection 138(12) of the Act.

Immigration

In general terms, under paragraph 128.1(1)(b) of the Act, when an individual immigrates to Canada and becomes a Canadian resident, the individual is deemed to have disposed of each property (other than certain property as described in that paragraph) owned by the individual immediately before that time for proceeds of disposition equal to the fair market value of the particular property at that time. Moreover, under paragraph 128.1(1)(c) of the Act, the individual is deemed to have reacquired each such property so disposed of at a cost equal to the amount of the deemed disposition proceeds. Very generally, the effect of these deeming provisions is that, for purposes of computing Canadian income tax, an individual who becomes resident in Canada will have a cost base for most of the individual’s property that is equal to the fair market value of the property upon entering Canada.

It should be noted that, the deemed disposition described in paragraph 128.1(1)(b) of the Act would generally not apply to a taxpayer’s interest in a “life insurance policy in Canada”, which is defined in subsection 138(12) of the Act as a life insurance policy issued or effected by an insurer upon the life of a person resident in Canada at the time the policy was issued or effected.

Annual accrual

When a taxpayer holds an interest in a life insurance policy last acquired after 1989, subsection 12.2(1) of the Act generally requires the taxpayer to report accrued income relevant to the policy on an annual basis. As described in the previous section, where subsection 128.1(1) of the Act applies, the individual will be deemed to have “last acquired” the life insurance policy at the time the individual became resident in Canada for the purposes of subsection 12.2(1) of the Act at a cost equal to the fair market value of the policy upon entering Canada.

In general terms, 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 (Regulations) each year, over the policy’s “adjusted cost basis” (ACB), as defined in subsection 148(9) of the Act. The accumulating fund is essentially a measure of the accumulating investment growth or build-up in the policy over time. In very general terms, the ACB of a policyholder’s interest in a life insurance policy is defined as the cost of the interest in the policy acquired by the policyholder plus the amount by which the cash premiums paid by the policyholder, and any income in respect of the policy that has previously been reported for tax purposes.

The annual accrual does not apply to interests in certain annuity contracts or a life insurance policy that is an “exempt policy”. An “exempt policy”, for income tax purposes, is a life insurance policy that satisfies certain criteria, set out in section 306 of the Regulations. The rules in section 306 of the Regulations apply on a policy-by-policy basis and require actuarial calculations and information that only the issuing insurer will possess. In broad terms, an exempt policy is a policy that is primarily designed to fund a death benefit, rather than one designed to be an investment and savings vehicle. A life insurance policy issued by a non-resident insurer is not specifically precluded from qualifying as an exempt policy and thus, such a policy could qualify as an exempt policy provided the criteria in section 306 of the Regulations are satisfied.

Maturity and policy gain

Under the Act, a payment resulting from the death of the insured person under a life insurance policy (other than an annuity contract) that is an exempt policy, is not a disposition. As a result, such payment is received tax-free.

However, the maturity of a life insurance policy results in a disposition of a policyholder’s interest in the policy under subsection 148(9) of the Act. As a result, the policyholder is required to include in computing income a policy gain in respect of the disposition, computed as the amount by which the proceeds of the disposition (PoD) exceeds the policyholder’s ACB (see previous section) of that interest immediately before the disposition. A life insurance policy is not a capital property and therefore the full amount of the policy gain is required to be reported by the taxpayer in computing income.

Similar to our comments above regarding exempt policies, the determination of the amounts that are used to compute any policy gain with respect to a life insurance policy [e.g., PoD, ACB] generally requires information that is available only in the accounts of the issuer of the policy (i.e., the insurer).

Foreign Property Reporting

The Act contains foreign property reporting rules that require a person that owns “specified foreign property”, the total cost of which exceeds $100,000 at any time in the year, to file a prescribed form (T1135) by that person's normal tax return filing deadline under Part I of the Act. A “specified foreign property” is defined in subsection 233.3(1) of the Act and could include, where applicable, a taxpayer’s interest in a foreign life insurance policy. In this regard, the $100,000 test is applied to the “cost amount” of all specified foreign property of the taxpayer, computed in the aggregate. Accordingly, where the aggregate of the cost amount of all the specified foreign property held by a taxpayer exceeds $100,000, the taxpayer will be required to report each specified foreign property the taxpayer holds, even though no particular specified foreign property has a “cost amount” exceeding $100,000. Further information on the foreign reporting requirements are available on the CRA website at https://www.canada.ca/en/revenue-agency/services/tax/international-non-residents/information-been-moved/foreign-reporting/foreign-income-verification-statement.html.

The CRA tries to meet the needs of all taxpayers and their advisors, however, the Canadian tax system relies on self-assessment because it is not possible to review the facts of every taxpayer's situation before the taxpayer files a tax return.

We trust that these comments will be of assistance.

Yours truly,

Bob Naufal
Manager
Financial Institutions Section
For Director
Financial Industries and Trusts Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch