Principal Issues: What are the tax consequences of the transfer of a life insurance policy by an individual to his wholly-owned corporation
Position: Amount included in his income under subsection 148(1). Not enough information available to comment on subsection 15(1) and other provisions of the ITA.
Reasons: Statutory provisions.
XXXXXXXXXX 2008-030397 R. Gagnon May 27, 2009
Dear Sir,
Subject: Transfer of a whole life insurance policy
This is in response to your letter of December 15, 2008 in which you requested our opinion regarding the tax consequences under the Income Tax Act (the "Act") resulting from the transfer of a life insurance policy in a situation as described below.
Unless otherwise indicated, all legislative references herein are to the provisions of the Act.
An individual is the owner of a whole life insurance policy and the person whose life is insured under the policy. The "adjusted cost basis" (as defined in subsection 148(9)) of the individual's interest in the life insurance policy is $45,000. The cash surrender value of the life insurance policy and the "value" (as defined in subsection 148(9)) of the individual's interest in the policy is $140,000. The fair market value ("FMV") of the life insurance policy is $450,000.
The individual owns all of the issued and outstanding shares of the capital stock of a holding corporation and has effective control of the corporation. The individual wishes to transfer his life insurance policy to his holding corporation and receive as consideration two notes payable by the corporation on demand. The principal amount of one note corresponds to the cash surrender value of the life insurance policy (i.e. $140,000) and the principal amount of the other note corresponds to the amount by which the FMV of the life insurance policy exceeds its cash surrender value (i.e. $310,000).
Our Comments
The situation you have presented in your request appears to be related to an actual situation, concerning specific taxpayers. As stated in paragraph 22 of Information Circular 70-6R5 Advance Income Tax Rulings of May 17, 2002, it is not the practice of the Income Tax Rulings Directorate to comment on proposed transactions that involve specific taxpayers otherwise than in the form of an advance income tax ruling. We can, however, offer the following general comments which we hope you will find useful.
Subsection 148(1) provides that on the disposition of an interest in a life insurance policy (other than a policy described in paragraphs 148(1)(a) to 148(1)(e)), the life insurance policyholder must include in computing income for the taxation year in which the disposition occurs, the amount, if any, by which the proceeds of the disposition of the policyholder’s interest in the policy that the policyholder, beneficiary or assignee, as the case may be, became entitled to receive in the year exceeds the adjusted cost basis (as defined in subsection 148(9)) to the policyholder of that interest immediately before the disposition.
The provisions of subsection 148(7) apply where an interest of a policyholder in a life insurance policy is disposed of by way of a gift, by distribution from a corporation or by operation of law only to any person, or in any manner whatever to any person with whom the policyholder was not dealing at arm’s length. In those circumstances, the policyholder is deemed to become entitled to receive proceeds of the disposition equal to the value of the interest at the time of the disposition, and the person who acquires the interest because of the disposition is deemed to acquire it at a cost equal to that value.
The term "value" is defined in subsection 148(9), in particular for the purposes of section 148. This definition provides that the "value" at a particular time of an interest in a life insurance policy means where the interest includes an interest in the cash surrender value of the policy, the amount in respect thereof that the holder of the interest would be entitled to receive if the policy were surrendered at that time, and in any other case, nil.
In the situation presented, the individual and the corporation are related because of subparagraph 251(2)(b)(i), and they are deemed not to deal with each other at arm's length by virtue of paragraph 251(1)(a). Subsection 148(7) would apply to the transfer of the life insurance policy by the individual because the proposed transfer would be to a person (a holding corporation) with whom the individual does not deal at arm's length. Consequently, the individual would be deemed to be entitled to receive proceeds of disposition equal to the "value" of $145,000, and the corporation would be deemed to acquire the life insurance policy at a cost equal to that value.
In addition, in the situation presented, the individual would be required to include an amount of $95,000 by virtue of subsection 148(1) in computing income for the taxation year in which the transfer takes place.
We are not prepared to comment on the application of subsection 15(1) in the situation presented on the basis only of the information presented. For example, we do not know who the beneficiary of the death benefit is under the life insurance policy and whether the beneficiary is revocable or irrevocable. In addition, we are not prepared to comment on the application of other anti-avoidance provisions without having an actual situation and all the relevant facts relating thereto. You may, however, make an application for advance rulings in respect of proposed transactions that are contemplated, if applicable.
Furthermore, the situation described in your application has been brought to the attention of the Ministry of Finance.
Please note that this opinion is not an advance ruling and, as stated in paragraph 22 of Information Circular 70-6R5 of May 17, 2002, it is not binding on the Canada Revenue Agency.
Best regards,
Manager
Financial Sector and Exempt Entities Section
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch.