Principal Issues: 1. Is a disability insurance policy excluded from the deemed disposition rules in s. 128.1 where an individual ceases to be a resident of Canada?
2. If a disability insurance policy is subject to the deemed disposition rules, can the CRA confirm that the proceeds of disposition would be NIL for the purposes of this provision?
Position: 1. No.
2. No.
Reasons: 1. The exclusion in subsection 128.1(10) refers to a life insurance policy. Where a disability policy is not a life insurance policy, the exclusion does not apply.
2. The disposition is at fair market value. The fair market value of a disability policy is a question of fact.
CALU CRA Roundtable - 2010
Question 9: Definition of Property for Purposes of s. 128.1
In accordance with paragraph 128.1(4)(b) of the Act, a taxpayer is deemed to dispose of "each property owned by the taxpayer" at the property's fair market value when departing Canada. The deemed disposition does not apply to certain specified exceptions. One such exception is for property that is an "excluded right or interest". A life insurance policy, other than a segregated fund policy is defined to be an excluded right or interest under s. 128.1(10)(l). However, where an insurance policy is not a life insurance policy, it appears that there is no similar exclusion and therefore the deemed disposition rules appear to apply. For example, a personally owned disability insurance policy, which provides for specified benefits to be paid in the event of the disability of the insured, would appear to be caught.
As there is no situation where a Canadian resident holder of a disability insurance policy would be required to dispose of their policy and have a realization of "income" for tax purposes, it is arguable that this section should not apply to bring about this result simply because the individual departs from Canada.
Questions:
a) Can the CRA please confirm that a disability insurance policy is not subject to the deemed disposition rules in s. 128.1 where an individual ceases to be a resident of Canada?
b) If a disability insurance policy is subject to the deemed disposition rules, can the CRA confirm that the proceeds of disposition would be NIL for the purposes of this provision?
CRA's Response
Paragraph (l) of the definition of "excluded right or interest" in subsection 128.1(10) refers to a "life insurance policy in Canada". Pursuant to subsection 138(12) a "life insurance policy in Canada":
means a life insurance policy issued or effected by an insurer on the life of a person resident in Canada at the time the policy was issued or effected;
Where a disability policy is not an excluded policy because it is not a life insurance policy, it will be deemed to be disposed of for proceeds of disposition equal to the fair market value of the policy. Such fair market value is a question of fact to be determined in the circumstances. However, paragraph 128.1(4)(b) only requires an amount to be included in income to the extent that there would have been an inclusion had the policy actually been disposed of.
Terry Young
2010-035941
May 4, 2010