3 May 2022 CALU Roundtable Q. 11, 2022-0928911C6 - Segregated Funds - S 160

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.

Principal Issues: Can the CRA confirm its assessing practices under section 160 of the Act in relation to beneficiary designations under segregated fund policies?

Position: General comments provided.

Reasons: Given the unique financial products, and various legislation governing them, the application of section 160 of the Act is decided on a case-by-case basis.

CALU Roundtable – May 2022

Question 11 – Application of Section 160 to Segregated Fund Policies

Background

Where a tax debtor has transferred property to a non-arm’s length person (such as a spouse, child, sibling or parent) for low or no consideration, section 160 of the Income Tax Act (the “Act”) provides that the transferee becomes jointly and severally liable for the tax debtor’s tax debt for an amount up to the fair market value of the property transferred less any consideration paid by the transferee on the transfer.

A 2013 decision of the Tax Court of Canada (TCC) in Higgins v. The Queen (2013 DTC 1163) involved a non-registered segregated fund, the proceeds of which were paid as a death benefit to the two daughters of the deceased owner of the registered segregated fund. The CRA unsuccessfully argued that the payment of the death benefit constituted a transfer to which section 160 of the Act applied. In its decision, the TCC made the following statements:

“As a hybrid fund, although it was a contract with London Life for an investment plan designed to produce a return, it was also an insurance policy pursuant to which Arthur W. Higgins could designate beneficiaries of any balance upon his death.” [paragraph 33]

“Regarding the nature of the segregated fund at issue, I conclude that the overarching feature was the life insurance component. The Estate of the late Arthur W. Higgins was not party to the contract with London Life. In paying each appellant the sum of $5,096.08 on February 21, 2002, London Life was fulfilling a legal obligation. The Minister assumed – incorrectly – that the segregated fund belonged in the same category as an RRSP or RRIF. That is not correct according to the evidence which permits me to accept the proposition that the right to confer a death benefit to named beneficiaries was an integral and indivisible component of the policy/plan in force.” [paragraph 34]

Question

We are aware of a number of recent situations where the CRA has attempted to apply section 160 of the Act in very similar circumstances (i.e., where the death benefit under a segregated fund contract has been paid to non-arm’s length beneficiaries under the contract). Can the CRA confirm that it agrees with the TCC decision in Higgins and confirm its assessing practices under section 160 of the Act in relation to beneficiary designations under segregated fund policies?

CRA Response

The TCC may hear appeals under the informal or general procedure. In Higgins, the appellants chose the informal procedure. This procedure offers a number of advantages, for instance, it is generally more expedient than the general procedure and more flexible in its application of the rules of evidence. To illustrate how the rules of evidence are more flexible, in Higgins, it was within the TCC’s ability to refer to the insurer’s website, even though neither party had brought this information into evidence.

In addition, decisions issued under the informal procedure are not normally precedent setting or relied upon in other cases unlike decisions issued under the general procedure.

The insurance industry is complex in terms of the financial products offered and the legislation that governs them. To name a few statutes, the Act, the various provincial insurance legislation, provincial estate law and retirement plan legislation may come into play. Due to the complex nature of these products, the application of section 160 of the Act is decided with consideration to the specific contracts and legislation that applies to each case.

In Higgins, the TCC had to decide which features were predominant in a policy designated as a non-registered freedom fund segregated fund investment. If it were those of a life insurance policy, section 160 of the Act did not apply and if it were those of an investment product, section 160 of the Act applied. In light of the evidence before it, including what it could find on the insurers’ web site, the TCC decided that the overarching feature was the life insurance component and therefore, in its view section 160 of the Act did not apply.

Although the analysis was needed in a different setting, in Orpin v. Littlechild et al, (2011 ONSC 7695), the Ontario Superior Court of Justice was also faced with having to decide whether the life insurance policy or the investment product features were predominant in a similar segregated fund policy, structured as an RRSP. Here, the Court held that the investment product features were predominant.

These federal and provincial court decisions could be fact-driven or a sign of unsettled case law with respect to how segregated funds offered by insurers may be characterized. Therefore, with so many unique financial products, and various legislation governing them, the application of section 160 of the Act is decided on a case-by-case basis.

Response prepared by Canada Revenue Agency Collections and Verifications Branch.

Bob Naufal
2022-092891
May 3, 2022