Section 148

Subsection 148(2) - Deemed proceeds of disposition

Administrative Policy

19 March 1992 T.I. (Tax Window, No. 18, p. 21, ¶1822)

Where a policy holder provides standing instructions to make partial withdrawals from his savings account this, by itself, will not constitute the disposition or part disposition of an interest in the life insurance policy.

Paragraph 148(2)(e)

Articles

Kevin Wark, Michael O'Connor, "The Next Phase of Life Insurance Policyholder Taxation is Nigh", Canadian Tax Journal (2016) 64:4, 705 - 50

Impact of death benefit on adjusted cost basis of a multi-life policy (pp. 730-1)

New paragraph 148(2)(e)…applies to a situation where an insurance death benefit is paid that results in a termination of coverage but not termination of the policy—that is, there are other coverages under the policy that remain in effect. If the fund value benefit [f.n. 109… defined in regulation 1401(3)] that is paid out exceeds the maximum amount permitted in respect of the terminated coverage,[f.n. 110: … regulation 306(4)(a)(iii)] a policyholder with an entitlement to the excess portion is deemed to have disposed of a "part of an interest" for proceeds equal to that excess portion. …

Example 4

Corporation A purchases a multi-life policy after 2016 with the following coverages:

  • life-insured 1—$1 million;
  • life-insured 2—$100,000.

Assume that on the fifth anniversary of the policy, the total cash value is $120,000 and the ACB of the policy is $80,000. Further assume that if the insurance coverage had been issued separately, the maximum fund value at the fifth policy anniversary for the coverage on life-insured 1 would have been $120,000, and for life-insured 2 it would have been $20,000.

If we assume that life-insured 2 dies at this point in time, corporation A will receive a death benefit of $220,000, consisting of the $100,000 coverage on this life-insured and the $120,000 fund value.

As discussed below [not included], paragraph 148(2)(e) will deem $100,000 of the fund value death benefit to be proceeds of the disposition. In determining the taxable amount of the proceeds, subsection 148(4) will require an allocation of the ACB of the policy as follows:

$80,000 (full ACB) × 100,000/120,000 = $66,667.

This will result in a taxable gain of $33,333 ($100,000 proceeds less $66,667 ACB).

Subsection 148(4.01)

Articles

Kevin Wark, Michael O'Connor, "The Next Phase of Life Insurance Policyholder Taxation is Nigh", Canadian Tax Journal (2016) 64:4, 705 - 50

Deeming of partial surrender of policyholder’s interest so as to reduce policy loan to be loan repayment followed by partial surrender (pp. 732-3)

This will result in a taxable gain of $33,333 ($100,000 proceeds less $66,667 ACB).

The overall purpose of these changes is to ensure that the partial disposition rules in subsection 148(4) cannot be avoided by first making a policy loan and then effecting a partial disposition of the policy. Subsection 148(4.01) will adjust the ACB of the interest in the policy to avoid the potential for double taxation of the same gain in the future.

Example 5

Policy Issued Before 2017

Assume that Mr. B has a policy with an ACB of $40,000 and a cash surrender value of $120,000. Mr. B withdraws $30,000 from the policy. This withdrawal constitutes proceeds from the disposition of an interest in the policy. Under subsection 148(4), the pro rata ACB associated with this disposition is $10,000 ($40,000 × $30,000/$120,000). This results in a taxable gain of $20,000 (proceeds of $30,000 − ACB of $10,000). The ACB of the policy is now $30,000, being reduced by the proceeds of disposition and increased by the taxable gain reported on that disposition, and the cash surrender value of the policy has been reduced to $90,000.

Now assume that instead of taking a partial withdrawal of $30,000 from the policy, Mr. B first takes a policy loan for $30,000. While a policy loan is treated as a disposition of an interest in the policy, subsection 148(4) does not apply to prorate the ACB of the policy. As a consequence, since the ACB of the policy exceeds the amount of the policy loan, there is no reportable gain on the taking of the policy loan. However, the ACB of the policy is reduced from $40,000 to $10,000.

Assume that Mr. B subsequently makes a withdrawal from the policy to repay the policy loan. This would initially result in proceeds of disposition of $30,000. However, the definition of "proceeds of the disposition" reduces these proceeds by the amount used to repay the policy loan ($30,000), [f.n. 112: See subparagraph (i) of element C of paragraph (a) of the definition of "proceeds of the disposition" in subsection 148(9).] resulting in nil proceeds of disposition. The end result is that Mr. B has been able to withdraw $30,000 from the policy without any amount being included in income (in effect, avoiding the ACB proration rules in subsection 148(4)). The ACB of the policy at this point remains at $10,000, and the cash surrender value is $90,000. Consequently, there remains $80,000 of accrued gain that would be taxable upon a subsequent disposition of the entire policy.

Policy Issued After 2016

The definition of "proceeds of the disposition" has been amended so that the proceeds arising from a partial withdrawal will not be reduced by the amount of any policy loan outstanding where the policy loan has previously been taken in cash (rather than used to pay premiums). As a consequence, the partial withdrawal by Mr. B to repay the policy loan will result in proceeds of disposition of $30,000. Subsection 148(4) will then apply, and the ACB of the interest in the policy will need to be prorated to determine whether there is a policy gain. In determining the ACB of the policy, subsection 148(4.01) deems the policy loan of $30,000 to have been repaid immediately before the partial surrender. As a consequence, the ACB of the policy will increase from $10,000 to $40,000 and the prorated ACB will be $10,000 ($40,000 × $30,000/$120,000), resulting in a $20,000 policy gain. As well, the ACB of the policy will be adjusted to equal $30,000. Note that this is the same result as under the initial fact pattern, where there was no policy loan taken in advance of the policy surrender.

Subsection 148(7) - Disposition at non-arm’s length and similar cases

Administrative Policy

5 October 2018 APFF Financial Strategies and Financial Instruments Roundtable Q. 1, 2018-0761521C6 F - Life insurance policy as share redempt. proceeds

more gain will be realized if an appreciated life insurance policy is distributed as redemption proceeds rather than a dividend-in-kind

2017-0690331C6 found that a dividend-in-kind by a subsidiary to its parent of a life insurance policy would result in proceeds of disposition to it equal to the greater of the policy’s cash surrender value (CSV) and its adjusted cost basis (ACB), rather than equaling the policy’s higher fair market value (FMV), given that the dividend would not result in consideration being given for the policy. If the subsidiary instead transfers a policy with a CSV and ACB of $50,000 and $25,000, respectively, on the redemption of preferred shares having an FMV equal to the policy’s FMV of $100,000, would its proceeds of disposition be $100,000 notwithstanding that the proceeds would only have been $50,000 if there instead had been a dividend-in-kind?

In effectively answering “$100,000,” CRA stated:

[T]he word "consideration" must, for the purposes of subsection 148(7), receive the broad meaning generally accorded to it in the jurisprudence … [so that where] on a share redemption, the redemption price paid by a corporation is an interest in a life insurance policy that the corporation transfers to the shareholder, the CRA is of the view that the shareholder gave consideration (the redeemed shares) to the corporation for the interest thus transferred.

CRA went on to note that the different treatment for a redemption may reflect an anomalous treatment for a dividend-in-kind, which has been brought to Finance’s attention.

14 May 2015 CLHIA Roundtable Q. 5, 2015-0573821C6 - Safe income

distribution to shareholder at CSV

Prior to a sale by Holdco of all the shares of Opco to an arm's length purchaser, Opco will transfer its interest in the Policy on the life of Mr. X (the sole shareholder of Holdco) to Holdco by way of a dividend-in-kind. The Policy has a nil ACB, $200,000 FMV, $100,000 CSV and $1,000,000 death benefit. CRA stated:

According to subsection 148(7), a corporation that holds an interest in a life insurance policy is deemed to have become entitled to receive proceeds of the disposition equal to the "value" of the interest where it disposes of such interest by way of a distribution to a person with whom it does not deal at arm's length. Where the interest in a life insurance policy includes an interest in the cash surrender value of the policy, subsection 148(9) provides that its "value" is equal to the [CSV].

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 55 - Subsection 55(2) policy premiums reduce SIOH only if they do not increase CSV 356

14 May 2015 CLHIA Roundtable, 2015-0573841C6 - 2015 CLHIA Roundtable – Winding-up and ACB

s. 69(5) generally prevails over s. 148(7)

At the 2005 CALU Roundtable (2005-0116631C6), the CRA indicated that s. 69(5) would likely take precedence over s. 148(7) on the wind-up of a corporation under s. 88(2), so that a distributed interest in a life insurance policy would be disposed of at fair market value rather than cash surrender value. In confirming that this position "remains unchanged," CRA stated:

[T]he general rule is that where two provisions in the same statute conflict, the more specific provision should take precedence. … While we would generally expect subsection 69(5) to take precedence over subsection 148(7)… this approach is subject to a review of the particular facts and circumstances of an actual case… .

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 69 - Subsection 69(5) s. 69(5) generally prevails over s. 1487 106

21 November 1991 T.I. (Tax Window, No. 13, p. 20, ¶1607)

Where a taxpayer, who owns a 1/4 interest in a life insurance policy transfers his interest to the other three owners with whom he does not deal at arm's length, his proceeds of disposition will be deemed to be 1/4 of the value of the policy (as defined in s. 148(9)(g)), at the time of disposition with the result that any deemed proceeds in excess of his ACB will be included in his income under s. 148(1) and s. 56(1)(j), and the other three policyholders will each add 1/3 of the deemed proceeds to the ACB of their respective interests.

Articles

David Louis, Michael Goldberg, "Life Insurance: Exploring the Corporate Edge - Part II", Tax Topics No. 1682, June 3, 2004, p. 1.

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Tax Topics - Income Tax Act - Section 15 - Subsection 15(1) 18

Paragraph 148(7)(a)

Administrative Policy

6 October 2017 APFF Financial Strategies and Financial Instruments Roundtable Q. 9, 2017-0705231C6 F - Gift of a Life Insurance Policy and Subrogated Own

gain by estate on gift of policy based on cash surrender value

The will of Mr. Donor provided for a gift of his life insurance policy on the life of his daughter to a private foundation. On his death, the policy had a cash surrender value (CSV), adjusted cost basis (ACB) and fair market value (FMV) of $200,000, $50,000 and $500,000, respectively. This gift was made by his graduated rate estate within three years of his death. Does this gift generate a gain under s. 148(7) of $150,000 (being the CSV excess over ACB)? CRA responded:

To the extent that the $200,000 CSV represents the "value" of the interest within the meaning of subsection 148(9), Mr. Donor will be deemed to have become entitled to receive proceeds of disposition equal to $200,000 (the greatest of (i) the value of the interest to Mr. Donor ($200,000), (ii) the FMV of the consideration given for the interest ($0) and (iii) the ACB of the interest to Mr. Donor ($50,000)). …[A] gain of $150,000 … in respect of the disposition of … the policy should be included in computing his income for the taxation year of his death … .

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 118.1 - Subsection 118.1(1) - Total Charitable Gifts - Paragraph (c) - Subparagraph (c)(i) - Clause (c)(i)(C) claim in terminal return for charitable gift made by estate under individual’s will 416
Tax Topics - Income Tax Act - Section 118.1 - Subsection 118.1(1) - Total Charitable Gifts - Paragraph (c) - Subparagraph (c)(i) - Clause (c)(i)(A) no guidance on whether designating a charity as a contingent policyholder generates a charitable credit 203

18 May 2017 Roundtable, 2017-0690331C6 - CLHIA Q2 Dividend in kind transfer of policy

avoidance of an FMV disposition on a dividend-in-kind of a life insurance policy

Mr. X holds the preferred shares of Opco with a redemption value of $1 million, and adjusted cost base and paid-up capital of $1, and a family trust holds the common shares. Opco owns a $1 million life insurance policy on the life of Mr. X with a cash surrender value of $500, adjusted cost basis (ACB) of $50,000 and fair market value $450,000. If the Policy is transferred to Mr. X as a dividend in kind on his preferred shares, what would be the proceeds of the disposition of the Policy to Opco, the income inclusion to Mr. X and the ACB of the Policy to Mr. X? CRA responded:

[P]aragraph 148(7)(a) would apply to deem the proceeds of the disposition to Opco to equal $50,000 (the greatest of CSV ($500), consideration (nil) and ACB ($50,000)), resulting in a policy gain of nil. Mr. X would be deemed to acquire the interest in the Policy at $50,000 pursuant to paragraph 148(7)(b). At the same time, subsection 82(1) would result in an income inclusion to Mr. X…[of] $450,000 plus a gross up… .

In cases where the FMV of the interest in the life insurance policy is greater than the ACB of that interest, subsection 148(7) provides for a transfer of the interest on a rollover basis (assuming that the consideration given for that interest and the CSV are equal to or less than the ACB). Notwithstanding that the shareholder will have an ACB in the policy that is less than FMV, it is not clear that this result is intended in terms of tax policy. We have brought this situation to the attention of the Department of Finance for their consideration.

7 June 2017 External T.I. 2016-0671731E5 F - Transfer of life insurance policy by dividend in kind

dividend-in-kind of a life insurance policy avoids the policy’s disposition at FMV

Holdco, which was the holder and beneficiary of a life insurance policy on the life of its sole shareholder, transferred the policy to him as a dividend in kind. The adjusted cost basis (“ACB”), cash surrender value and fair market value (“FMV”) of the policy were $200,000, $240,000 and $450,000, respectively. Would the proceeds of disposition of the policy be determined on the basis that no consideration was given for the transferred policy? CRA responded that s. 148(7)(a) applied to deem Holdco:

to have become entitled to receive proceeds of disposition equal to $240,000 (the greater of (i) the cash surrender value of the interest ($240,000), (ii) the FMV of any consideration for the interest (N/A), and (iii) the ACB of the interest to Holdco ($200,000).) The result would be a gain to Holdco of $40,000… . Mr. X… would be deemed to acquire his interest in the policy for $240,000. In addition, pursuant to… subsection 82(1), Mr. X should include in his income an amount equal to the FMV of the interest in the policy ($450,000), but as increased in accordance with paragraph 82(1)(b).

…[T]he gain on the disposition of the interest in the policy that Holdco must include in computing its income is less than that which it would have been required to include had it instead sold its interest to Mr. X at its FMV. … We have brought this situation to the attention of the Department of Finance.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 52 - Subsection 52(2) proceeds and cost of distributed life insurance policy determined under s. 148(7) rather than s. 52(2) 83

7 October 2016 APFF Financial Strategies and Financial Instruments Roundtable Q. 3, 2016-0651761C6 F - Transfer of a Life Insurance Policy

s. 148(7)(a) prevails over s. 69(1)(b) and 52(2), but not s. 69(5)

(a) Mr. X, who has for a number of years been the policy holder of a term life insurance policy (for 100 years) without a cash surrender value and an adjusted cost basis of $10,000, transfers the policy to his wholly-owned corporation (ABC Inc.) for no consideration, so that it becomes the policyholder and beneficiary and assumes the premium-payment obligations. Would Mr. X’s proceeds of disposition under proposed s. 148(7)(a) be $10,000 given that there is no “consideration…given” and that s. 69(1)(b) only deems proceeds to have been “received”?

(b) At the 2005 CALU Roundtable, CRA indicated that s. 69(5) (respecting a s. 88(2) wind-up) prevailed over s. 148(7). However, in 920437, CRA indicated that s. 148(7) prevailed over the more general rule in s. 52(2). Is CRA prepared to recognize the primacy of s. 148(7) given its specific nature?

CRA responded:

Since the preamble to subsection 69(1) provides that it is applicable "except as expressly otherwise provided in this Act," it follows that proposed paragraph 148(7)(a) prevails over paragraph 69(1)( b).

Given the above, Mr. X is deemed to have become entitled to receive proceeds of disposition equal to $10,000 under proposed paragraph 148(7)(a).

Respecting (b), CRA stated:

Given the…limited scope of the proposed amendments with respect to the disposition of an interest in a life insurance policy, the CRA is of the view that the comments made at the two Roundtables are still valid.

Subsection 148(8) - Idem [Disposition at non-arm’s length and similar cases]

Administrative Policy

8 May 2018 CALU Roundtable Q. 3, 2018-0745831C6 - Subsection 148(8) transfer

s. 148(8) rollover can apply on a policy transfer to a substituted child

After referencing inter alia 2004-0065441C6, which indicated that an s. 148(8) rollover would not apply to a transfer of a life insurance policy under which more than one person is insured even where all the lives insured meet the definition of child, the questioner referred to Father, who has owned a life insurance policy on Child A’s life, transfers the policy to Child B, whom he regards as more financially responsible. Does this transfer occur on a rollover basis under s. 148(8)? CRA stated:

Subsection 148(8) … provides that, if an interest of a policyholder in a life insurance policy (other than an annuity contract) is transferred to the policyholder’s child for no consideration and a child of the policyholder or a child of the transferee is the person whose life is insured under the policy, the interest is deemed to have been disposed of by the policyholder for proceeds of the disposition equal to the adjusted cost basis of the interest immediately before the transfer, and to have been acquired … at a cost equal to those proceeds.

…[S]ubsection 148(8) of the Act would apply to the transfer of Father’s interest in the life insurance policy on the life of Child A to Child B.

We are not certain that the results described above are consistent with the intended policy of subsection 148(8), and it is therefore our intention to bring the matter to the attention of the Department of Finance … .

5 June 2013 External T.I. 2013-0481381E5 - Transfer of Life Insurance Policy

In confirming that the transfer of a life insurance policy jointly owned by the parents to their adult son whose life is insured under the policy would qualify for the rollover under s. 148(8), CRA stated:

The fact that the policy was jointly owned by the parents prior to the transfer would not, in and of itself, preclude the policy from being transferred at its adjusted cost basis….

15 February 1995 T.I. 943386 (C.T.O. "Disposition of Life Insurance Policy on Death")

S.148(8) does not apply where, on the death of a policyholder, the policy is transferred to the policyholder's child under the terms of the will of the deceased.

11 July 1989 T.I. (Dec. 89 Access Letter, ¶1059)

The rollover is not available on the transfer of a life insurance policy from a husband who is the basic life insured to his wife who was the additional life insured, because the wife was not the life insured under the policy.

Subsection 148(8.1) - Inter vivos transfer to spouse

Administrative Policy

10 December 1992 Memorandum (Tax Window, No. 27, p. 8, ¶2339)

Where a taxpayer has elected not to have s. 148(8.1) apply, s. 148(7) will apply. After the passage of Bill C-92, s. 148(8.1) will apply to a common-law spouse.

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Tax Topics - Income Tax Act - Section 148 - Subsection 148(8.2) 40

Subsection 148(8.2) - Transfer to spouse at death

Administrative Policy

10 December 1992 Memorandum (Tax Window, No. 27, p. 8, ¶2339)

Where an election is made not to have s. 148(8.2) apply, s. 148(7) will not apply because of the exclusion for dispositions deemed to occur pursuant to s. 148(2)(b). After the passage of Bill C-92, s. 148(8.2) will apply to a common-law spouse.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 148 - Subsection 148(8.1) 26

Subsection 148(9) - Definitions

Adjusted Cost Basis

See Also

Kratochwil v. The Queen, 2012 DTC 1084 [at 2917], 2012 TCC 45

The taxpayer, upon redemption of his life insurance policy, was unsuccessful in asserting that his adjusted cost basis was equal to the entire $127,368 he had paid in premiums under the policy to date. The taxpayer had failed to take into account that a considerable portion of his premiums had gone towards covering a $300,000 death benefit over the period in which he was insured.

Administrative Policy

3 June 2014 External T.I. 2014-0524031E5 - Life insurance policy disposition

general discussion re pre-1983 policies

[T]he net cost of pure insurance (the "NCPI")… represents the cost the policyholder paid to be covered by insurance during the time he or she held the policy. The reduction of ACB by NCPI applies to life insurance policies acquired after December 1, 1982.

…In the case of a pre-December 2, 1982 life insurance policy, the full amount of the premiums paid is included in the calculation of the ACB and there is no reduction in respect of the NCPI. However, certain changes made to a pre-December 2, 1982 policy may cause it to lose this favourable treatment (e.g., where after December 1, 1982, a premium is paid under the policy which was not fixed on or before that date, and either (a) the policy is not an exempt policy, or (b) there has been a prescribed increase in any benefit on death under the policy).

18 February 2014 External T.I. 2013-0515011E5 - Life insurance premiums and policy loan

general discussion re corporate owned policy

A corporate policyholder and beneficiary of an exempt universal life policy on the life of one of its key shareholder pays the premiums on the policy and then receives a cash withdrawal from the policy, which the insurer advises is a policy loan. CRA provided a general discussion, including the following:

The ACB of a policyholder's interest in a life insurance policy is determined at any particular time by a formula under subsection 148(9) of the Act. In very general terms, the ACB will be 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 exceeds the net cost of pure insurance under the policy.

Furthermore, proceeds of the disposition in respect of a policy loan will reduce the ACB and a gain resulting from a policy loan will increase the ACB. Note that policy loan repayments that were not deductible under paragraph 60(s) of the Act (as described below) will be added to the ACB, to a maximum of the proceeds of the disposition in respect of the loan.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 148 - Subsection 148(9) - Proceeds of Disposition general discussion re corporate owned policy 180

23 March 1992 External T.I. 5-911717 -

Where one private company is the beneficiary of a life insurance policy taken out by a second holding company on the life of that second company's sole shareholder, the ACB of the policy to the first company would be nil because it was not the policy holder. Accordingly, the full amount of the insurance proceeds would be added to its capital dividend account.

12 November 1991 T.I. (Tax Window, No. 13, p. 5, ¶1592)

Where an individual owns a life insurance policy and pays the premiums, there will be no addition to the corporation's adjusted cost basis of the policy because that paragraph creates a cost base only for the policyholder.

Disposition

Administrative Policy

17 February 2016 External T.I. 2015-0608261E5 - Splitting of a Multiple Life Insurance Policy

disposition where change going to root of policy

Respecting the exercise by a policyholder of a contractual right to split a universal life insurance policy covering two lives into two policies, CRA indicated that whether there was a disposition on general principles (before looking at s. 148(10)(d)) turned on whether “the changes that are made to the terms of the policy…are so fundamental as to go to the root of the policy.”

Words and Phrases
disposition
Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 148 - Subsection 148(10) - Paragraph 148(10)(d) s. 148(10)(d) does not apply to the exercise of a right to split an insurance policy 246

25 February 2003 External T.I. 2002-013889 -

While not legally obligated to provide funding to terminally ill policyholders with a life expectancy of less than 24 months, life insurers are considering providing loans to such policyholders out of their general funds and receiving an assignment of the life insurance policy as security for the loan. The payment of the loan proceeds would not result in a disposition of the life insurance policy. (However, where such a loan is provided for under the terms and conditions of the life insurance policy, the loan would be a "policy loan" and would result in a disposition.)

August 1994 Memorandum 940797 (C.T.O. "Deferred and Prescribed Annuity Contracts")

Re: whether the conversion of a deferred annuity contract into a prescribed annuity contract would constitute a disposition of the deferred annuity contract.

31 January 1994 T.I. 933643 (H.A.A. 5720-1) (C.T.O. "Disability Benefitting Group Insurance Policy:)

An amendment to a group insurance policy to pay special disability benefits either as an advance or as a claim in itself would not result in a disposition of the policy provided the death benefit is reduced by the amount of the special benefit but is not otherwise altered, and there is no additional cost to the policyholder/employer or the insured.

19 March 1992, T.I. 920085 (April 1993 Access Letter, p. 150, ¶C144-206)

The furnishing of outstanding instructions or the making of an election by a policyholder with respect to future withdrawals would not normally constitute a disposition.

9 March 1994 T.I. 933379 (C.T.O. "Mortgage Insurance Cashback Program")

A payment received by a policyholder under a mortgage life insurance policy equal to 10 years of premiums paid under the policy will be considered to be proceeds of disposition of a part interest in the policy.

Policy Loan

Administrative Policy

3 July 1991 T.I. (Tax Window, No. 5, p. 15, ¶1333)

A loan made by an insurance company to a policy holder under a formal agreement similar to that used by a bank or trust company nonetheless would be considered to be a policy loan if the loan need not be repaid until the death of the insured, or where the loan agreement and the policy appear to be so interdependent as to constitute a single agreement.

Proceeds of Disposition

Administrative Policy

18 February 2014 External T.I. 2013-0515011E5 - Life insurance premiums and policy loan

general discussion re corporate owned policy

A corporate policyholder and beneficiary of an exempt universal life policy on the life of one of its key shareholder pays the premiums on the policy and then receives a cash withdrawal from the policy, which the insurer advises is a policy loan. CRA provided a general discussion, including the following:

The "proceeds of the disposition" of an interest in a life insurance policy is defined in subsection 148(9) of the Act as the amount of the proceeds that the policyholder is entitled to receive on the disposition. Where the disposition is the result of a policy loan, the proceeds of the disposition is the lesser of the following amounts:

  • a) the amount of the loan, other than the portion of the loan used to pay a premium under the policy, as provided for under the terms and conditions of the policy, and
  • b) the amount, if any, by which the cash surrender value of the policy before the loan was made exceeds the total of the balances outstanding at that time of any policy loans in respect of the policy.
Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 148 - Subsection 148(9) - Adjusted Cost Basis general discussion re corporate owned policy 186

9 July 2012 External T.I. 2012-0438751E5 F - Police d'assurance-vie

proceeds of disposition arise when policy settled and are calculated by insurer

Does a taxpayer have to include an amount in computing income when settling the taxpayer's life insurance policy at age 65 (before death)? In responding affirmatively, CRA stated:

[T]he disposition of an interest in a life insurance policy includes the dissolution of that interest by virtue of the maturity of the policy. …

In general, the proceeds of disposition of an interest in a life insurance policy correspond to the amount of the proceeds that the policyholder is entitled to receive on a disposition of an interest in the policy. …

The amount of the proceeds of disposition of an interest due to maturity and the adjusted cost basis are amounts that only the insurer can establish because it has all the necessary elements for that purpose.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 237 - Subsection 237(1.1) provision of SIN by holder of matured policy to insurer is required 86

Subsection 148(10)

Paragraph 148(10)(d)

Administrative Policy

17 February 2016 External T.I. 2015-0608261E5 - Splitting of a Multiple Life Insurance Policy

s. 148(10)(d) does not apply to the exercise of a right to split an insurance policy

The taxpayer is the policyholder of a universal life insurance policy providing life insurance coverage on the lives of the taxpayer and the taxpayer’s child (“additional insured”). Both coverages have cost of insurance charges that apply for 10 years and coverage as long as the life insured is alive, and guaranteed cash values. The policy gives the policyholder the contractual right to split the coverage by setting up a separate policy respecting the child that has the same death benefit, same cost of insurance charges and same guaranteed cash values. In exercising this right, the policyholder opts to be the owner of the separate policy rather than the child. Does the exercise of this contractual right result in a disposition under s. 148(1)?

After noting the definition of disposition in s. 148(9) and before declining to answer the question in the absence of a review of the policy, CRA stated:

In order to give meaning to the word "only" [in s. 148(10)(d)], it… is necessary to determine whether the changes that are made to the terms of the policy, including but not limited to the premium structure, are so fundamental as to go to the root of the policy. If this were the result, there would be a disposition of the policy… .

…The Act does not contemplate the splitting of a multiple life insurance policy into separate policies. Accordingly, …the objective of introducing paragraph 148(10)(d)… was not to provide for a non-disposition of the policy in these circumstances.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 148 - Subsection 148(9) - Disposition disposition where change going to root of policy 65