Principal Issues:
Whether the value as defined in subsection 148(9) would be reduced by surrender charges.
Position:
None.
Reasons:
Question of contract and fact.
CALU - Conference for Advanced Life Underwriting (2008)
Question 4
Valuation of life insurance policies with no cash surrender value
Some universal life insurance policies have an explicit surrender charge in the early years that results in very low cash surrender values during those years. Over a period of time those surrender charges are reduced and eventually disappear. The effect is similar to deferred sales charges or back-end load fees on a mutual fund unit. However, the accumulating fund, which equates with the account value in the plan, continues to grow. The account value would approximate the cash surrender value before surrender charges.
If the ownership of a policy is transferred in a non-arm's length transaction (such as to or from a controlled private corporation) the transfer occurs at the cash surrender value of the policy in accordance with the provisions of subsections 148(7) and (9) of the Act.
If, at the time of transfer, surrender charges are still in effect, these would reduce the cash surrender value for purposes of determining the proceeds of disposition of the policy.
Questions:
Does the CRA agree that the value of the policy in a non-arm's length or an arm's-length transfer, as described in subsection 148(7) of the Act, is the amount the holder is entitled to receive, net of surrender charges?
CRA's Response
Other than by virtue of a deemed disposition under paragraph 148(2)(b) of the Act, subsection 148(7) of the Act applies when an interest of a policyholder in a life insurance policy is disposed of at arm's length by way of a gift, by operation of law only or by distribution from a corporation. It also applies to any such dispositions at non-arm's length. For purposes of subsection 148(7) of the Act, we are of the opinion that the value of a life insurance policy corresponds to the amount determined according to the definition of that term under subsection 148(9) of the Act. Consequently, the same definition applies whether it is an arm's length or non -arm's length disposition.
The question of whether or not an amount constitutes the "value" as defined in subsection 148(9) of the Act depends upon all the terms and conditions of a particular policy and the law applicable to the policy.
We are of the view that such an examination could be done in the context of an advance income tax ruling request submitted in the manner set out in Information Circular 70-6R5, Advance Income Tax Rulings, dated May 17, 2002, where all the relevant facts and documentation are submitted.
Louise J. Roy
2008-027041
(613) 958-8968
April 29, 2008