S. 39(1)(a)(iii) provides that a taxpayer’s capital gain excludes gain from the disposition of an insurance policy, including a life insurance policy, except for “that part of a life insurance policy in respect of which a policyholder is deemed by paragraph 138.1(1)(e) to have an interest in a related segregated fund trust”. CRA considered that on this basis “a disposition of an interest in a related segregated fund trust will generally result in capital gains treatment” so that “the interest may be considered a capital property, and accordingly, an eligible property under paragraph 85(1.1)(a) of the Act for purposes of subsection 85(1).” Accordingly, such an interest could be transferred on a s. 85(1) rollover basis. Before so concluding, CRA stated:
Under the current scheme of the Act, two distinct types of interests are contemplated for life insurance contracts that are segregated fund policies. First, there is the interest in a contract that is deemed under subparagraph 138.1(1)(e)(i) of the Act to be an interest in a related segregated fund trust (“the first interest”). Second, there is the remaining interest in the life insurance policy that is not deemed to be an interest in a related segregated fund trust (“the second interest”). The adjusted cost base of the first interest is determined by section 53 of the Act, while subsection 148(3) of the Act excludes amounts relevant to the first interest from the adjusted cost basis of the second interest.