| 24(1) | 5-910313 |
| A. Seidel | |
| (613) 957-8960 | |
| Attention: 19(1) | |
| August 1, 1991 |
Dear Sirs:
This is in reply to your letter of January 24, 1991 with respect to the application of subsection 148(8) of the Income Tax Act (the "Act). We apologize for the delay in replying to your letter. All further references to statute are to the Act unless otherwise indicated.
Subsection 148(8) provides that in the situation where an interest of a policyholder in a life insurance policy is transferred to the child of the policyholder for no consideration and where the transferee or a child of the policyholder or transferee is the person whose life is insured under the policy, the interest shall be deemed to have been disposed of by the policyholder for proceeds of disposition equal to the adjusted cost basis to the policyholder of the interest immediately before the transfer and to have been acquired by the child at a cost equal to that amount.
In the situation where a rider providing for additional life insurance is added at any time after 1989 to a life insurance policy last acquired before 1990, subsection 12.2(10) deems the rider to be a separate life insurance policy issued at the time the rider is added. Subsection 148(8) could apply where the parent subsequently transfers the rider to the child as the requirements of paragraphs 148(8)(a) and (b) could be satisfied. The applicability of subsection 148(8) will depend on the facts of the specific situation and there may be other tax implications as a consequence of the addition of a rider.
Whether or not an interest in a life insurance policy purchased after 1989, which policy insures a parent and has a rider added to insure a child of the parent, can be transferred by the parent to the child pursuant to subsection 148(8) is a question of fact which can only be determined by examining the terms of the life insurance policy. Subject to the comments below, it is generally our view that the provisions of subsection 148(8) will not have application where there is more than one life insured under the policy.
In the situation where a policy is silent with respect to the addition of a rider, we would likely consider that the amending of the policy to provide for the addition of a rider would result in a deemed disposition of the existing policy. To the extent that the deemed proceeds of disposition exceed the policyholder's adjusted cost basis of his interest in the original policy, the policyholder would have an income inclusion pursuant to subsection 148(1). In a situation where a policy at the time of its issue provides for the addition of a rider at some future time, while subject to the terms of the specific policy, we would not expect that the exercise of this provision would result in a deemed disposition of the policy or an income inclusion under subsection 148(1). In either case it is our view that the requirements in paragraph 148(8)(b) can only be satisfied if there is only one person (ie. the child in this case) insured under the policy. Unless the rider could be viewed as a separate policy which insures only the life of the child, it could not subsequently be transferred to the child pursuant to subsection 148(8). Absent the application of a provision such as subsection 12.2(10), it would have to be established factually that the rider is a separate policy.
While we hope our comments are of assistance to you they do not constitute an advance income tax ruling and therefore are not binding on the Department in respect of a specific situation.
Yours truly,
for DirectorFinancial Industries DivisionRulings Directorate