Principal Issues: Following the death of a taxpayer, when a spousal trust becomes the owner and the revocable beneficiary of an insurance policy on the life of the trust’s residual beneficiaries, whether the rollover provided in subsection 70(6) is available if the trustee is required to pay life insurance premiums out of the trust capital or income?
Position: No, the spousal trust will generally not qualify for a rollover under subsection 70(6).
Reasons: As a result of the duty to pay life insurance premiums out of the trust capital or income, persons other than the surviving spouse or common-law partner may, before the survivor’s death, obtain the use of the trust income or capital.
FINANCIAL STRATEGIES AND INSTRUMENTS ROUNDTABLE 5 OCTOBER 2018
2018 APFF CONFERENCE
Question 7
Life Insurance for Children and Spousal Trust
Mr. A dies and in his will he bequeaths the residue of his property to a spousal trust. Among the assets that make up the residue of the estate are two insurance policies taken out by Mr. A (the holder and beneficiary) on the lives of his adult children (the insureds). The policies have cash surrender values and are subject to the continued payment of premiums.
The CRA has previously confirmed in Technical Interpretations 2006-0174041C6 (footnote 1), 2006-0185551C6 (footnote 2) and 2012-0435681C6 (footnote 3) that the fact that the spousal trust held a policy on the life of the spouse and paid the premiums had the effect of tainting the trust since its income or capital could benefit a third party, as the death benefit would only be paid on the death of the spouse (the beneficiary of the trust):
“In order for property to be transferred on a tax-deferred (“rollover”) basis from a deceased taxpayer to a trust, subparagraph 70(6)(b)(ii) requires that the trust be one under which no person except the surviving spouse or common-law partner (“survivor”) of the taxpayer may, before survivor’s death, receive or otherwise obtain the use of any of the income or capital of the trust. Our position is that the mere possibility of a person other than the survivor receiving or obtaining, before the survivor’s death, use of the trust capital or income is sufficient to disqualify the property transfer from the rollover.
A duty to fund a life insurance policy out of trust capital or trust income would, in our view, be one under which a person may obtain the use of the trust capital or income. This is because the premium payment is assumed to maintain, for the period covered by the premium, the rights to receive insurance proceeds. Therefore, the existence of such a trust term would be relevant whether a rollover of property can occur to the trust under paragraph 70(6)(b) of the Act.”
Question to the CRA
Would CRA have a different policy regarding a policy on the lives of the children who otherwise would be the residuary beneficiaries of the capital of the trust, having regard to the trust being the policyholder and beneficiary of the policy and given that the insured amount could benefit the spouse if a child were to predecease the spouse?
CRA Response
As stated in the CRA documents referred to above, as well as in the answer to question 1 of the 2012 APFF Financial Strategies and Instruments Roundtable (footnote 4), we are of the view that the obligation of a spousal trust for a spouse or common-law partner (the "Trust") to fund a life insurance policy out of the capital or income of the trust could, depending on the circumstances, result in a person other than the spouse or common-law partner obtaining the use of any part of the income or capital of the Trust for the purposes of subparagraph 70(6)(b)(ii).
The question of whether the condition set out in subparagraph 70(6)(b)(ii) is satisfied is a question of fact and law that can only be resolved after a thorough examination of all the facts, actions, circumstances and relevant documents surrounding each situation.
Assuming that the Trust is the revocable beneficiary of a life insurance policy and that the ownership of such contract has been lawfully transferred to it as a consequence of the death of the testator, the fact that the insured children are the residuary beneficiaries of the Trust and the insurance proceeds could benefit the surviving spouse or common-law partner in the event that the insured children predeceased the surviving spouse or common-law partner generally does not change the position provided by the CRA in the above documents.
In fact, the payment of a life insurance premium is presumed to maintain, for the period covered by the premium, the rights to receive the insurance proceeds by the beneficiary of the policy. In this case, the latter could at any time be a person other than the surviving spouse or common-law partner. Accordingly, we are of the view that the condition set out in subparagraph 70(6)(b)(ii) that no person except the surviving spouse or common-law partner may, before the death of such survivor, receive or obtain the use of any part of the income or capital of the Trust, is not satisfied.
Marie-Claude Routhier
(613) 670-8921
5 October 2018
2018-076151
FOOTNOTES
Due to our system requirements, footnotes contained in the original document are reproduced below:
1 CANADA REVENUE AGENCY, Technical Interpretation 2006-0174041C6, 2 November 2006.
2 CANADA REVENUE AGENCY, Technical Interpretation 2006-0185551C6, 11 September 2006.
3 CANADA REVENUE AGENCY, Technical Interpretation 2012-0435681C6, 8 May 2012.
4 CANADA REVENUE AGENCY, Technical Interpretation 2012-0453121C6, 5 October 2012.