Principal Issues: Tax treatment of UK endowment policy acquired by a non-resident individual and the individual later immigrates to Canada.
Position: General comments provided.
Reasons: Insufficient information.
2004-009629 XXXXXXXXXX G. Moore (613) 957-2141 May 11, 2007
Dear XXXXXXXXXX:
Re: United Kingdom ("UK") Endowment Policy
We are writing in response to your letter regarding the income tax treatment of a UK endowment policy acquired by a non-resident who later immigrated to Canada. We apologize for the extended delay in replying.
From 1970 to 1976, the taxpayer was employed at a UK university. The university issued whole life endowment funds that matured when an individual turned age 65. The individual contributed 4% of his income to the policy. The taxpayer immigrated to Canada in 1976. The taxpayer received the proceeds at age 65. You are asking whether the proceeds from the policy are taxable.
Our Comments
As set out in Information Circular 70-6R5, "Advanced Income Tax Rulings, dated May 17, 2002, it is not this Directorate's practice to comment on completed transactions involving specific taxpayers. This Information Circular and other CRA publications can be accessed on the internet at http://www.cra-arc.gc.ca. Should you require additional assistance, you should submit all relevant facts and documentation to the appropriate Tax Services Office ("TSO") for their views. A list of TSOs is available on the "Contact Us" page of the CRA website. Although we cannot comment on your specific situation, we are prepared to provide the following general comments, which may be of assistance.
The term "life insurance policy" is broadly defined in subsection 138(12) of the Income Tax Act (the "Act"). Based on the limited information provided, it appears that a UK endowment policy would constitute a life insurance policy within the meaning of subsection 138(12) of the Act, which is generally a question of fact and law. While not necessarily conclusive, where a product provides for a death benefit or constitutes an annuity arrangement, it may be suggestive that it could be a life insurance policy for purposes of the Act. If it does fall within the definition, it would not be considered to be capital property.
At the time of the taxpayer's immigration into Canada in 1976, there would be no deemed disposition and reacquisition of the endowment policy immediately before or immediately after that time, as the case may be, because the policy was not a capital property and the rule in former subsection 48(3) of the Act did not apply.
For purposes of subsection 12.2(1) of the Act, since the policy was last acquired before 1983 or 1990, there was no requirement to report any accrued income of the policy on a triennial basis (under former section 12.2(3)) or on an annual basis (under subsection 12.2(1) as the case may be.
On the maturity of the endowment policy, the taxpayer was considered to have disposed of the policy and he or she was required to report income under paragraph 56(1)(j) of the Act equal to the amount by which the proceeds of disposition exceeds the adjusted cost base of the policy to the policyholder, pursuant to subsection 148(1) of the Act. Please refer to Interpretation Bulletin IT-87R2, Policyholders Income from Life Insurance Policies, which contains information about the calculation of the adjusted cost base of a policy.
Note that for years that begin after 2002, proposed subsection 94.2(11) applies if a taxpayer holds, at any time in a particular year, an interest in a foreign insurance policy. A discussion of these rules is beyond the scope of this letter.
We trust that these comments will be of assistance.
Yours truly,
Olli Laurikainen
For Director
International and Trusts Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch