16 October 1996 External T.I. 9622725 - LIFE INSURANCE PROCEEDS

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:

Are the proceeds of an exempt life insurance policy received by a beneficiary as a result of the death of the life insured tax-free?

Position:

Yes.

Reasons:

Pursuant to subsection 148(1) amounts received by a beneficiary may be included in the calculation of the income of the policyholder. A policyholder would not include a beneficiary unless the beneficiary has an interest in the policy. The payment of a death benefit under an exempt policy is not a disposition by virtue of the exclusion in paragraph (j) of the definition of "disposition" in subsection 148(9). Accordingly, subsection 148(1) would not apply and there is no provision in the Act to require the beneficiary to include the death benefit in income.

									5-962272
XXXXXXXXXX							J. Leigh

Attention: XXXXXXXXXX

October 16, 1996

Dear Sirs:

Re: Life Insurance Proceeds - Subsection 148(1)

This is in reply to your facsimile of June 25, 1996 in which you requested our views with respect to the tax treatment of life insurance proceeds received by a beneficiary as a result of the death of the life insured under an exempt life insurance policy. We apologize for the delay in responding.

The determination of the proper tax consequences relating to any particular situation will depend on an analysis of all the facts, documentation and other information pertaining to the situation. To the extent that you require assistance in determining the tax treatment with regard to a completed transaction, you should contact your district tax services office. To the extent that you require confirmation of the tax consequences of proposed transactions, your request should be the subject of a request for an advance income tax ruling. However, we can provide you with the following general comments which are not binding on the Department.

Paragraph 56(1)(j) of the Income Tax Act (the "Act") requires a taxpayer to include in income the amount determined under subsection 148(1) of the Act. Under subsection 148(1) of the Act, a policyholder is required to include in income in respect of the disposition of an interest in a life insurance policy an amount by which the proceeds of the disposition of the policyholder's interest in the policy that the policyholder, beneficiary or assignee is entitled to receive exceeds the policyholder's adjusted cost basis of that interest immediately before the disposition. We note that it is the policyholder who is required to include in income any gain from the disposition of an interest in a policy under subsection 148(1) of the Act even though the proceeds may be received by the beneficiary or assignee. Generally, a policyholder is a person who owns an interest in a life insurance policy. A beneficiary, on the other hand, does not normally acquire such an interest since a beneficiary designation can usually be revoked by the policyholder at any time.

A "disposition" is defined for the purposes of section 148 of the Act in subsection 148(9) of the Act to include and exclude certain transactions and events. By virtue of paragraph (j) of the definition, a disposition does not include a payment in consequence of the death of any person whose life was insured under an exempt policy or a life insurance policy that was last acquired before December 2, 1982. Therefore, if the life insured under an exempt policy dies, the termination of the policy is not a disposition. Accordingly, subsection 148(1) of the Act would not have application and therefore no amount would be included in the policyholder's income in respect of the benefit received by the beneficiary.

Where the life insurance policy is not an exempt policy and was acquired after December 1, 1982, the death of the life insured results in a disposition of an interest in the policy immediately before the death by the policyholder pursuant to paragraph 148(2)(b) of the Act. Subparagraph (d)(i) of the definition of "proceeds of the disposition" in subsection 148(9) of the Act deems the policyholder to have received proceeds equal to the "accumulating fund" in respect of policyholder's interest in the policy immediately before the time of death. As a result, any accrued income to the date of death is included in the income of the policyholder to the extent that the deemed proceeds exceed the policyholder's adjusted cost basis.

Finally, it is our position that "income from property" would, for the purposes of the Act, include an amount required to be included in income under paragraph 56(1)(j) of the Act in respect of a disposition of an interest in a life insurance policy. However, as indicated above, the payment of death benefits in certain circumstances is excluded from the definition of "disposition" in subsection 148(9) of the Act.

We trust that these comments are of assistance but as noted above they are of a general nature and may not be appropriate with regard to a specific situation.

Yours truly,

Chief
Financial Institutions Section
Financial Industries Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch