Section 148

Subsection 148(1)

See Also

Andersen v. The Queen, 2020 TCC 51 (Informal Procedure)

Minister’s reassessments for unreported insurance proceeds failed due to failure to assume what was the policies’ adjusted cost basis

The taxpayers terminated life insurance policies for personal purposes, and were ultimately reassessed to include in their income the gross amounts received by them.

Spiro J set the stage by noting (at para. 14) that “In order for the Minister to assess a policyholder under … subsection 148(1)… the “adjusted cost basis” of the policy to the policyholder immediately before its disposition must be determined,” and by stating (at para 25):

The courts have consistently held that unless the Minister’s assumptions of fact are sufficient to support the assessment under the relevant legislation, the onus does not shift to the taxpayer.

Here, the Reply had stated that the Minister’s assessing assumptions included that the amounts so received “were the net proceeds after the subtraction of the Appellant’s adjusted cost basis with respect to the Policies.” Spiro J indicated that this “bald assertion” was “grossly inadequate” (para. 34) given that the amount included in each taxpayers’ income in fact “was simply an amount equal to the ‘proceeds of the disposition’ of each policy” (para. 35).

Thus, even though the taxpayers did not tender any evidence to speak of, their appeals were allowed (para. 36):

The onus never shifted to the Appellants to disprove the Minister’s assumption about the “adjusted cost basis” of each policy immediately before its disposition because the Minister never made any such assumption.

Locations of other summaries Wordcount
Tax Topics - General Concepts - Onus assessments vacated for failure to assume the policiers' ACB 286

Administrative Policy

7 October 2011 Roundtable, 2011-0408351C6 F - Honoraire d'évaluation d'une police d'assurance

no deduction from gain for disposition expenses

An actuary is retained to determine the fair market value of a life insurance policy by an individual to a wholly-owned corporation, and the transferor and transferee split the actuary’s fee. Respecting the deductibility to the transferor, CRA stated:

By virtue of 148(1), a policyholder must include any excess of the proceeds of disposition of the policyholder’s interest in the policy, which, in this case, is the value of the policyholder’s interest in the policy over the adjusted cost basis of that interest immediately before the disposition. Expenses incurred by the policyholder in making the disposition are not included in that calculation.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 148 - Subsection 148(9) - Adjusted Cost Basis - Element A valuing the FMV of acquired property not considered to be part of its cost 126

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)(b)

Administrative Policy

6 January 2005 Internal T.I. 2004-0100241I7 F - Imposition des rentes au décès

no disposition of PAC under s. 148(2)(b) – but disposition if estate elects to commute

Regarding the taxation of prescribed and non-prescribed annuity contracts on the death of the holder and annuitant (the "Annuitant"), the Directorate referred to ss. 148(2)(b) and (c), and then stated:

[O]n the death of a prescribed annuity contract holder, the deemed disposition rule in paragraph 148(2)(b) does not apply. …

If the annuity contract provides that on the death of the Annuitant, the Estate continues to receive the annuity amounts but also has the option to terminate the annuity contract and receive a lump sum, there will be a disposition of the prescribed annuity contract by the Estate when it makes the election.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 148 - Subsection 148(9) - Proceeds of Disposition - Paragraph (d) disposition gain based on accumulating fund 140

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 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 374

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 112

27 May 2009 External T.I. 2008-0303971E5 F - Transfer of a life insurance policy

gain under s. 148(7) on drop down of policy (with CSV exceeding its ACB) by individual to his corp.

An individual is the owner of, and the insured under, a whole life insurance policy having an adjusted cost basis of $45,000, a cash surrender value (“CSV”) and "value" (as defined in s. 148(9)) of $140,000, and a fair market value ("FMV") of $450,000. The individual transfers the policy to a wholly-owned corporation in consideration for two demand notes in respective amounts equalling the CSV, and the FMV excess over the CSV (i.e., $310,000).

Respecting the consequences of the transfer, CRA noted that s. 148(7) would apply “because the proposed transfer would be to a person (a holding corporation) with whom the individual does not deal at arm's length,” and stated:

Consequently, the individual would be deemed to be entitled to receive proceeds of disposition equal to the "value" of $145,000, and the corporation would be deemed to acquire the life insurance policy at a cost equal to that value.

In addition, in the situation presented, the individual would be required to include an amount of $95,000 by virtue of subsection 148(1) in computing income for the taxation year in which the transfer takes place.

5 June 2007 Internal T.I. 2007-0237291I7 F - Disposition d'une police d'assurance-vie

s. 148(7) applicable to gift of policies by partners to a limited partnership

CRA indicated that it considers a partnership to be a person for income-computation purposes, so that s. 148(7) would apply to a gift of policies by partners to a limited partnership of which they were members.

6 October 2006 Roundtable, 2006-0197211C6 F - Transfert de police d'ass-vie entre sociétés

s. 148(7) applicable to policy transfer between sister corps

S. 148(7) applies where a corporation whose capital stock is wholly owned by an individual transfers an interest in a life insurance policy of the individual to another corporation whose capital stock is wholly owned by that individual.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 15 - Subsection 15(1) s. 15(1) could apply to the individual shareholder of Aco and Bco where Aco transfers an insurance policy at an undervalue to Bco 163

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.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 15 - Subsection 15(1) 18

Paragraph 148(7)(a)

Administrative Policy

6 October 2017 APFF Financial Strategies and 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 430
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 211

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) 87

7 October 2016 APFF Financial Strategies and 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.

Paragraph 148(7)(b)

Administrative Policy

14 May 2019 CLHIA Roundtable Q. 2, 2019-0799051C6 - 2019 CLHIA Roundtable - 148(7) questions

cost of policy gratuitously transferred to arm's length employee determined under s. 148(7)(b) rather than s. 52(1)

As a result of employee B no longer being considered to be a key employee, her employer (Corporation A) transfers its “key person” permanent life insurance policy on her life to her for nominal consideration. At the transfer time, the death benefit, cash surrender value and ACB are $1 million, $50,000 and $20,000, respectively. The policy FMV equals its CSV.

Does the transfer engage s. 6 or 148(7) or in Corporation A having to report a gain on disposition of the policy? After finding that s. 6(1)(a) applied to the employee and that s. 148(7) applied to the transfer, CRA stated:

Under paragraph 56(1)(j) and subsection 148(1), Corporation A would report a policy gain of $30,000. This policy gain is computed as the greatest of the three amounts described in paragraph 148(7)(a), which would be the CSV of $50,000, less the ACB of the policy of $20,000. …

Under paragraph 148(7)(b), Employee B will be deemed to have acquired the policy at a cost of $50,000 (which is the amount determined under paragraph 148(7)(a)).

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 6 - Subsection 6(1) - Paragraph 6(1)(a) s. 6(1)(a) applied to transfer of life insurance policy to employee at an undervalue, notwithstanding the application of s. 148(7) 171

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 External T.I. 9433865 - 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.

Locations of other summaries Wordcount
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

Administrative Policy

4 April 2005 External T.I. 2005-0110941E5 F - Transfert d'une police d'assurance-vie

ACB of life insurance policy transferred to shareholder increased by s. 15(1) benefit

After indicating that the acquisition by a shareholder of an interest in a corporate life insurance policy for less than the fair market value (FMV) of that interest would engage s. 15(1) to the extent of the excess of the FMV of the interest in the life insurance policy over the consideration paid, CRA stated:

[T]he amount by which the FMV of the interest in the policy included in income under subsection 15(1) exceeds the cash surrender value will be included in the ACB calculation. Consequently, the ACB of the life insurance policy interest for the shareholder following the transfer should be equal to the FMV of that interest.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 15 - Subsection 15(1) factors relevant to determining FMV of life insurance policy 117

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 192

19 September 2006 External T.I. 2006-0170861E5 F - Contrat de rente différé et perte courue

ACB does not reflect the income for the anniversary year if disposition of interest occurs immediately after the anniversary day

In the course of a general response to a question as to which insufficient facts were provided, CRA stated:

Subsection 148(9) defines the "adjusted cost basis" to a policyholder at a particular of the policyholder’s interest in a life insurance policy. The description of D in the definition provides, inter alia, for the addition of the total of all amounts each of which is an amount in respect of the policyholder’s interest in the policy that was, pursuant to section 12.2, included in computing the policyholder’s income for any taxation year ending before that time.

In a situation where there is a disposition of an interest in a policy immediately after the anniversary day of the same taxation year, we are of the view that the adjusted cost basis immediately before the time of disposition would not include the amount included in income pursuant to subsection 12.2(1) for the year.

Locations of other summaries Wordcount
Tax Topics - Income Tax Regulations - Regulation 307 - Subsection 307(1) - Paragraph 307(1)(b) overview of Reg. 307(1)(b) 235

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.

Element A

Administrative Policy

7 October 2011 Roundtable, 2011-0408351C6 F - Honoraire d'évaluation d'une police d'assurance

valuing the FMV of acquired property not considered to be part of its cost

An actuary is retained to determine the fair market value of a life insurance policy by an individual to a wholly-owned corporation, and the transferor and transferee split the actuary’s fee. Respecting the treatment of the fee to the transferee, CRA stated:

Under subsection 148(7), the cost to the corporation of its interest in the policy will be equal to the value determined under subsection 148(9). That amount will be included in Element A of the definition of "adjusted cost basis” in subsection 148(9). No adjustment is made to the calculation of the adjusted cost basis under that paragraph to reflect the costs that the corporation has made or incurred to obtain an assessment of the fair market value of the policy.

Words and Phrases
cost
Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 148 - Subsection 148(1) no deduction from gain for disposition expenses 110

4 May 2010 Roundtable, 2010-0359401C6 - Rebate Paid by an Advisor to a Policyholder

insurance premium rebate paid by broker does not reduce policy ACB

In certain provinces, a licensed insurance advisor is permitted to pay a portion of the commission earned as a "rebate" to a client purchasing an insurance policy. Can the purchaser reduce what would otherwise be his or her adjusted cost basis for the policy by the amount of the rebate? CRA stated:

Subsection 148(9) defines the adjusted cost basis of a life insurance policy and includes in variable A "the total of all amounts each of which is the cost of an interest in the policy..." This would include the initial premium paid for the policy. It is our understanding that any rebate paid by the insurance advisor to the policy purchaser would be made independent of the insurance company and would not, in fact, reduce the initial premium paid for the policy. Consequently, the cost of the policy for the purpose of variable A would not be reduced. Variables H through L of the definition of adjusted cost basis reduce the adjusted cost basis in a number of situations; however, none of those situations are applicable to the type of rebate in question.

… The [s. 53(2.1)] election generally allows the taxpayer to elect to reduce an amount that would otherwise be included in income pursuant to paragraph 12(1)(x), by reducing the adjusted cost base of the property in question by the amount so elected pursuant to paragraph 53(2)(s). However, as you indicated, the election does not allow the same treatment to be accorded to the adjusted cost basis of a life insurance policy.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 12 - Subsection 12(1) - Paragraph 12(1)(x) insurance policy premium rebate generally deductible by insurance advisor payor and included under s. 12(1)(x) in client’s income 108

Element E

Administrative Policy

8 October 2004 APFF Roundtable Q. 5, 2004-0089141C6 F - Compte de dividendes en capital

ACB of policy immediately before death reduced by policy loan

A corporate owner and beneficiary of a life insurance policy receives a death benefit in the amount of $850,000, less a policy loan of $150,000 ($1,000,000 - $150,000) in accordance with the terms of the life insurance policy. Regarding the ACB immediately before death, CRA stated:

[T]he ACB of the life insurance policy for CDA purposes is $50,000. The reduction of the benefit payable at death by the amount of the policy loan at death is not a repayment of a policy loan described in Element E of the definition of ACB in subsection 148(9). This is because the calculation of the ACB for purposes of the CDA definition is made immediately before death. Furthermore, Element E of the ACB requires consideration of policy loans repaid prior to the time of the ACB calculation.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 89 - Subsection 89(1) - Capital Dividend Account - Paragraph (d) amount net of policy loan added to CDA 156

Element L

Administrative Policy

14 October 2004 External T.I. 2004-0089921E5 F - Disposition d'une police d'assurance-vie

deduction of net cost of pure insurance effectively renders return of premiums partially taxable

In indicating that a refund of premiums on the maturity of a life insurance policy is taxable, where the proceeds of disposition exceed the adjusted cost basis of the policy, CRA stated:

The disposition of interests in a life insurance policy includes the liquidation of those interests by virtue of the maturity of the policy. …

[O]ne item that generally reduces the adjusted cost basis [of the policy] is the "net cost of pure insurance", as defined in subsection 308(1) of the Income Tax Regulations, calculated immediately before the end of the calendar year ending in a taxation year commencing after May 31, 1985, in respect of an interest in a life insurance policy (other than an annuity contract) last acquired after December 1, 1982. The net cost of pure insurance is that part of the accumulated savings or reserves of the policy which is used to pay for the insurance protection provided.

For a policy acquired before December 1, 1982, since the adjusted cost basis is not reduced by the net cost of pure insurance, it is possible that the return of premiums at maturity will not result in any taxable amount.

Disposition

Administrative Policy

APFF Financial Strategies and Instruments Roundtable, Q.2

implementing a life insurance interest sharing strategy may entail the entire policy’s disposition and uncertainties as to what interest is disposed of

An individual owning a policy on that individual’s life with coverage of $1 million, a cash surrender value (“CSV”) of $250,000 and an adjusted cost basis ("ACB") of $150,000, donates ½ of the individual’s interest in the policy to a registered charity or, alternatively, only donates ½ of the entitlement to the CSV. How is the gain under s. 148(7) computed? CRA responded:

[T]he donor will wish to ensure that a new policy is not created and that the portion of the policy the individual wishes to donate has been fully assigned in order to qualify for a donation tax credit. …

… [I]t would be necessary to determine, inter alia, whether the gift of a portion of the policy can be made without resulting, for the purposes of the applicable private law, in a disposition of the entire interest in the policy rather than just a portion of it. On the other hand, where a gift to a person of a portion of an interest in a policy is intended to establish a type of arrangement commonly referred to as a life insurance interest sharing strategy (and assuming that such a sharing is possible without resulting in a disposition of the entire interest in the policy), in addition, it would be necessary to determine whether it is possible to determine what fraction of the whole represents the portion assigned to the donee and also whether, as a result of the assignment, the donor and donee would be joint policyholders or, rather, each would own a separate 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 256

25 February 2003 External T.I. 2002-0138895 - LOAN TO TERMINALLY ILL POLICYHOLDER

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.)

27 June 1994 Internal T.I. 9407976 - 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.

1 November 1994 Internal T.I. 94234170 F - CBR Assurance-vie

amendment to policy to reduce premiums and insured amounts was not intended to create a new policy, and was not a disposition

A rider to a term life insurance policy amended the policy (in a manner not contemplated in the original policy) to provide that the premiums would no longer escalate over the balance of the first six years of the term and that there would be a resulting reduction in the amount insured by the policy. After the taxpayer’s death, and in connection with a capital dividend account computation, the taxpayer’s representatives took the view that this amendment resulted in the policy’s disposition, so that the adjusted cost basis of the “new” policy only reflected the premiums that had been paid subsequently to the amendment. In finding that there had been no disposition, the Directorate stated:

For the purposes of civil law, each individual has the right to modify the effects of the obligation and to extinguish it, in agreement with the individual’s co-contractor. Furthermore, the right to modify a contract without that possibility being expressly provided for in advance is a universally recognized principle of civil law.

[W]e cannot conclude from the sections of the CCLC dealing with obligations that the effect of the amendments to the life insurance policy would be to cancel the policy and create a second one. …

[I]t seems difficult to argue that the parties intended to create a new contract. Rather, the intention of the parties appears to have been to make a simple modification to the existing contract.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 248 - Subsection 248(1) - Disposition amending policy to reduce premiums and insured amount was not a disposition 56

31 January 1994 External T.I. 9336435 F - Disability Benefit and 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 External T.I. 9333795 F - 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.

Paragraph (d)

Administrative Policy

19 November 2009 External T.I. 2007-0257251E5 F - Assurance-vie

disposition by operation of law if there is a new contract

If a corporation which is the owner and beneficiary of a life insurance policy changes the beneficiary to its subsidiary, does this change result in the disposition of the policy? CRA responded:

The definition of "disposition" in paragraph 148(9)(d) specifies that there may be a disposition of an interest in a life insurance policy solely by operation of law. In our view, a disposition by operation of law alone can occur if a change to the existing contract results in the creation of a new contract under the Civil Code of Québec. … According to paragraph 148(10)(d), a policyholder is deemed not 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. Generally, the … CRA … considers that the change of beneficiary, in and of itself, does not constitute an amendment that results in a disposition of the life insurance policy.

Words and Phrases
operation of law
Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 148 - Subsection 148(10) - Paragraph 148(10)(d) designation of a different beneficiary does not entail a disposition 132
Tax Topics - Income Tax Act - Section 15 - Subsection 15(1) s. 15(1) benefit where sub is policyholder and premium payer and parent is beneficiary – but not for reverse 223
Tax Topics - Income Tax Act - Section 89 - Subsection 89(1) - Capital Dividend Account - Paragraph (d) CDA addition to beneficiary not reduced by ACB of policy to the different policyholder - but s. 246(1) or 245(2) germane 195

Paragraph (h)

Administrative Policy

30 November 2006 External T.I. 2006-0191541E5 F - Primes d'assurance-vie et d'assurance-invalidité

tax free receipt of disability insurance proceeds by lender on policy required by it of the borrower

A business receives a loan from a financial institution that requires the borrower to take out a disability insurance policy to secure the loan. CRA indicated that the proceeds received under the policy by the lender would be non-taxable under para. (h).

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 20 - Subsection 20(1) - Paragraph 20(1)(e.2) premiums on life insurance policy required by lender deductible even though loan government-guaranteed, but premiums on lender-required disability policy not deductible 163
Tax Topics - Income Tax Act - Section 18 - Subsection 18(1) - Paragraph 18(1)(b) - Capital Expenditure v. Expense - Financing Expenditures premiums on disability policy required by lender are capital expenditures 80
Tax Topics - Income Tax Act - Section 20 - Subsection 20(1) - Paragraph 20(1)(e.1) guarantee fee does not include premiums on lender-required insurance policy 75
Tax Topics - Income Tax Act - Section 148 - Subsection 148(9) - Disposition - Paragraph (j) tax free receipt of life insurance proceeds by lender on policy required by it of the borrower 44

Paragraph (j)

Administrative Policy

8 July 2020 CALU Roundtable Q. 2, 2020-0842141C6 - Return of premiums on death & CDA

a refund of premiums on death under a life insurance policy does not entail its disposition

A private corporation is the owner and beneficiary of an exempt life insurance policy (with an adjusted cost basis of $90,000) on the life of a shareholder, who dies from, say, suicide or skydiving, which does not void the policy, but instead results in the insurer repaying all premiums ($100,000).

CRA confirmed that there is a CDA addition of $10,000 under para. (d) of the CDA definition respecting the receipt of “proceeds of a life insurance policy... of which the corporation was... a beneficiary" received as a “consequence of the death of any person;" while at the same time, pursuant to para. (j) of s. 148(9) - “disposition,” there is no disposition in relation to an interest in a life insurance policy.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 89 - Subsection 89(1) - Capital Dividend Account - Paragraph (d) a refund of premiums on death under a life insurance policy can increase the CDA of the corporate owner 262

30 November 2006 External T.I. 2006-0191541E5 F - Primes d'assurance-vie et d'assurance-invalidité

tax free receipt of life insurance proceeds by lender on policy required by it of the borrower

A business receives a loan from a financial institution that requires the borrower to take out a life insurance policy to secure the loan. CRA indicated that the proceeds received under the policy by the lender would be non-taxable under para. (j).

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 20 - Subsection 20(1) - Paragraph 20(1)(e.2) premiums on life insurance policy required by lender deductible even though loan government-guaranteed, but premiums on lender-required disability policy not deductible 163
Tax Topics - Income Tax Act - Section 18 - Subsection 18(1) - Paragraph 18(1)(b) - Capital Expenditure v. Expense - Financing Expenditures premiums on disability policy required by lender are capital expenditures 80
Tax Topics - Income Tax Act - Section 20 - Subsection 20(1) - Paragraph 20(1)(e.1) guarantee fee does not include premiums on lender-required insurance policy 75
Tax Topics - Income Tax Act - Section 148 - Subsection 148(9) - Disposition - Paragraph (h) tax free receipt of disability insurance proceeds by lender on policy required by it of the borrower 44

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 the 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 194

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 98

1 March 2004 External T.I. 2003-0060381E5 F - Police d'assurance exonérée

proceeds must be recognized on termination of policy irrespective of whether an exempt policy

In the course of a general discussion, CRA stated:

An insurance policyholder who disposes of an interest in a life insurance policy must include in computing income under subsection 148(1) and paragraph 56(1)(j) ... the amount by which the proceeds of disposition of the policyholder's interest in the policy that the policyholder is entitled to receive in the year exceed the policyholder's adjusted cost basis in that interest immediately before the disposition. This income inclusion applies whether or not the policy is an exempt policy, as defined in section 306 of the Regulations.

In general terms, the proceeds of disposition of an interest in a life insurance policy are the amount of proceeds that the policyholder, beneficiary or assignee is entitled to receive on the disposition of the interest in the policy. The disposition of an interest in a life insurance policy includes the termination of that interest due to the maturity of the policy.

Paragraph (b)

Administrative Policy

30 May 2006 Internal T.I. 2006-0175401I7 F - Assurance-vie donnée en garantie

use of policy to secure shareholder loan is not a policy loan

A corporation acquires a universal life insurance policy on the life of its shareholder, with the amount of the insurance coverage and the cash surrender value being payable to it as the beneficiary. The shareholder obtains a personal line of credit from a financial institution, secured by a pledge of the cash surrender value of the policy. The interest on the loan is not paid but rather capitalized at the same rate as the increase in cash surrender value. On the death of the shareholder, the amount of the insurance coverage is paid to the corporation and the cash surrender value is paid to the financial institution to repay the shareholder's line of credit and the accumulated interest. Before going on to indicate that this arrangement might very well give rise to a taxable benefit under s. 15(1) (and also might engage GAAR), CRA stated:

A policy loan on a life insurance policy is a disposition of an interest in the policy under paragraph (b) of the definition of disposition in subsection 148(9). A policy loan as defined in subsection 148(9) means an amount advanced by an insurer to a policyholder in accordance with the terms and conditions of the life insurance policy. In general, the pledging of a life insurance policy as security for a loan from the policy issuer or a person related to the policy issuer does not, in and of itself, lead to the conclusion that a policy loan has been made.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 15 - Subsection 15(1) shareholder benefit where corporate universal life policy is pledged for shareholder loan, with loan plus accumulated interest repaid with cash surrender value of policy on the shareholder’s death 278

Paragraph (d)

Administrative Policy

6 January 2005 Internal T.I. 2004-0100241I7 F - Imposition des rentes au décès

disposition gain based on accumulating fund

Regarding the taxation of a non-prescribed annuity contracts on the death of the holder and annuitant (the "Annuitant") which is not subject to a rollover in favour of the deceased Annuitant's spouse under s. 148(8.2), the Directorate stated:

[O]n the death of the Annuitant, the rules in paragraph 148(2)(b) and paragraph (d) of the definition of proceeds of disposition in subsection 148(9) apply to deem a disposition by the Annuitant of the Annuitant’s interest in the annuity contract immediately before the Annuitant’s death for proceeds of disposition equal to the accumulating fund in respect of that interest, determined in prescribed manner immediately after the time of death. The result is to tax the increased income at the date of the Annuitant's death that has not otherwise been taxed as the Annuitant’s income.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 148 - Subsection 148(2) - Paragraph 148(2)(b) no disposition of PAC under s. 148(2)(b) – but disposition if estate elects to commute 111

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 67

19 November 2009 External T.I. 2007-0257251E5 F - Assurance-vie

designation of a different beneficiary does not entail a disposition

If a corporation which is the owner and beneficiary of a life insurance policy changes the beneficiary to its subsidiary, does this change result in the disposition of the policy? CRA responded:

[A] disposition by operation of law alone can occur if a change to the existing contract results in the creation of a new contract under the Civil Code of Québec. … According to paragraph 148(10)(d), a policyholder is deemed not 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. Generally, the … CRA … considers that the change of beneficiary, in and of itself, does not constitute an amendment that results in a disposition of the life insurance policy.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 148 - Subsection 148(9) - Disposition - Paragraph (d) disposition by operation of law if there is a new contract 162
Tax Topics - Income Tax Act - Section 15 - Subsection 15(1) s. 15(1) benefit where sub is policyholder and premium payer and parent is beneficiary – but not for reverse 223
Tax Topics - Income Tax Act - Section 89 - Subsection 89(1) - Capital Dividend Account - Paragraph (d) CDA addition to beneficiary not reduced by ACB of policy to the different policyholder - but s. 246(1) or 245(2) germane 195