13 February 2009 External T.I. 2009-0308411E5 - Disposition of a policy 148(9)

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: 1) For the purposes of (k) of the definition of disposition pursuant to ss.148(9), is an individual "totally and permanently disabled" where that individual is receiving CPP disability benefits? 2) In order for paragraph (k) of that definition to apply, is an exempt life insurance policy required to contemplate that the policy surrender and purchase of an annuity contract are as a result of the disability of the person whose life is insured?

Position: 1) Question of fact 2) No

Reasons: 1) Paragraph (k) of the definition of disposition found at ss.148(9) requires that the person whose life is insured be "totally and permanently disabled", which is independent of the requirements to receive CPP disability benefits, and must be determined based on the nature, severity, and expected duration of the impairment. 2) Further, the terms of the life insurance contract are not required to contemplate that the policy surrender and resulting issuance of an annuity are in consequence of the disability of the individual whose life is insured.

2009-030841
XXXXXXXXXX Robert Demeter
(613) 952-1505
February 13, 2009

Dear XXXXXXXXXX :

Re: Disposition of a Policy - ss.149(1)

We are writing in response to your correspondence dated January 30, 2009, requesting our comments on a hypothetical insurance arrangement involving the surrender of an exempt life insurance policy. We understand that in this hypothetical arrangement, the policyholder has selected to receive all of the resulting proceeds under an annuity option, being one of several payment options described under the terms of the policy. At the time of surrender of the policy, the individual, whose life is insured, is receiving disability benefits under the Canada Pension Plan Act (the "CPP Act").

You have asked whether paragraph (k) of the definition of "disposition" at ss.148(9) requires that the relevant insurance contract contemplate that the policy surrender and issuance of an annuity contract occurs as a consequence of the disability of the person whose life is insured.

Written confirmation of the tax implications inherent in particular transactions is given by this Directorate only where the transactions are proposed and are the subject matter of an Advance Income Tax Ruling request. Where the particular transactions are completed, the inquiry should be addressed to the relevant Tax Services Office. However, we are prepared to provide the following comments.

A "disposition" of an interest in a life insurance policy is defined in subsection 148(9) of the Act. Paragraph (k) of this definition provides that a disposition does not include any transaction or event by which an individual becomes entitled to receive, under the terms of an exempt policy, all of the proceeds (including or excluding policy dividends) payable under the policy in the form of an annuity contract or annuity payments, if, at the time of the transaction or event, the individual whose life is insured under the policy was totally and permanently disabled. In our view, paragraph (k) of the definition of "disposition" at subsection 148(9) does not require that the insurance policy contemplate the policy surrender and use of the full proceeds to purchase an annuity contract as a result of the disability of the individual whose life is insured. What is required is that the insured be totally and permanently disabled at the time he/she becomes entitled to receive all of the proceeds payable under the policy in the form on an annuity contract or annuity payments.

Whether the individual, whose life is insured, was totally and permanently disabled for the purposes of paragraph (k) is a question of fact that must be determined based on the nature, severity and expected duration of the individual's mental or physical impairment. The determination for the purposes of subsection 148(9) is independent of the disability determination required pursuant to the CPP Act.

Despite a determination that a disposition does not occur for the purposes of ss.148(9), the receipt of annuities does fall within the provisions of either subsection 12.2(1) or paragraph 56(1)(d) of the IT Act, as applicable, and should be reported as annuity income by a recipient in accordance with the relevant provision.

We trust that these comments will be of assistance.

Yours truly,

F. Lee Workman
Manager
Charitable and Financial Institutions Sectors
Financial Sector and Exempt Entities Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch