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.
Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the Department.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle du ministère.
Principal Issues:
1. Where two or more persons dispose of their interests in a life insurance policy in a private sale, is the insurer, upon written request, required to prepare separate T5 slips to report the gain realized by each person on the disposition?
2. Where a person has an interest in the investment account only of a universal life insurance policy, is the adjusted cost basis of such interest to be calculated without any adjustment for the net cost of pure insurance?
Position:
1. Yes, pursuant to subsection 217(2) of the Regulations.
2. The "net cost of pure insurance" is to be deducted in the calculation of "adjusted cost basis" as defined in subsection 148(9). For this purpose, the "net cost of pure insurance" is determined in accordance with the rules in section 308 of the Regulations. Depending on the circumstances, it is possible that this amount may be zero.
Reasons: Legislation.
XXXXXXXXXX 2001-008993
September 5, 2001
Dear XXXXXXXXXX:
Re: Life Insurance Policies
This is in reply to your letter of June 19, 2001, wherein you requested our views on the interpretation of subsection 217(2) of the Income Tax Regulations (the "Regulations") in a situation where two or more persons dispose of their interests in a life insurance policy in a private sale. You have also asked us to confirm that the adjusted cost basis ("ACB") of an interest in the investment account only of a universal life insurance policy would be calculated without any adjustment for the net cost of pure insurance.
Subsection 217(2) of the Regulations requires an insurer that is the issuer of a life insurance policy to prepare a T5 information return and a T5 slip to report the amount that is required to be included in computing a policyholder's income under paragraph 56(1)(j) of the Income Tax Act (the "Act") in respect of a disposition of an interest in the policy if the insurer is a party to, or is notified in writing of, the disposition.
Where an interest in a life insurance policy is sold from one person to another person without the involvement of the insurer, it is our view that the requirement in subsection 217(2) of the Regulations would apply to the insurer provided that the insurer is notified in writing of the disposition. While we have not previously considered this requirement in the context of a jointly held life insurance policy, it appears that the insurer would be required to prepare separate T5 slips, reporting the gain realized by each person on the disposition. In order to facilitate the calculation of the gain by the insurer, such persons would need to provide the insurer with sufficient information so as to enable the insurer to determine the proceeds and the ACB of each interest. Since the insurer is the issuer of the policy, it is likely that the insurer would have the information relevant to the calculation of the ACB of the interest(s) in the policy.
With regard to the second issue, you indicated that in the case of a universal life insurance policy, one person's interest might include the investment account only with another person owning the remainder interest in the policy. On the assumption that the investment account would consist only of deposits made and interest credited on such deposits, it is your view that the ACB of such interest would be determined without reference to the net cost of pure insurance. In such circumstances, the entire net cost of pure insurance would, in your view, reduce the ACB of the remaining interest only.
The ACB of an interest in a life insurance policy is determined in accordance with the formula set out in that definition in subsection 148(9) of the Act. In the case of an interest in a life insurance policy (other than an annuity contract) that was last acquired after December 1, 1982, component L of the formula reduces the ACB by the "net cost of pure insurance" as defined in subsection 308(1) of the Regulations. The net cost of pure insurance is essentially the product obtained when the probability (of death) is multiplied by the amount by which
(a) the benefit on death in respect of the taxpayer's interest at the end of the year
exceeds
(b) the accumulating fund (determined without regard to any policy loan outstanding) in respect of the taxpayer's interest in the policy at the end of the year or the cash surrender value of such interest at the end of the year, depending on the method regularly followed by the life insurer in computing net cost of pure insurance.
Depending on the facts of the particular case, it is possible that the "net cost of pure insurance" in respect of a taxpayer's interest in a life insurance policy may be zero. Since this is a factual determination, a definitive response can only be provided after a review of the terms and conditions of the particular universal life insurance policy and any relevant documents.
We note that it appears that the arrangement you described may be a split dollar arrangement. As stated at the 2001 Conference for Advanced Life Underwriting, the Rulings Directorate has not had the opportunity to review in detail these types of arrangements and is therefore not in a position to provide comments on specific tax aspects of such arrangements. However, we would be prepared to consider a request for an advance income tax ruling in respect of a specific proposed transaction. If the transaction is completed, the relevant facts and documentation should be submitted to the appropriate Tax Services Office.
While we hope that our comments will be of assistance to you, they are given in accordance with the practice referred to in paragraph 22 of IC 70-6R4 and are not binding on the Agency in respect of any particular situation.
Yours truly,
F. Lee Workman
Manager
Financial Institutions Team
Financial Industries Division
Income Tax Rulings Directorate
Policy and Legislation Branch
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