An individual owns a segregated fund policy in a non-registered account with a life insurance company, and is the annuitant under the policy. The policy was acquired on January 3, and the individual died on December 1 of the same year, with the surviving spouse becoming the owner. For that year, the insurer allocated the income (interest, dividends, capital gains, etc.) from the segregated fund to the policyholders based on the number of days in that calendar year that each held notional units of the segregated fund.
Do the income allocations not yet received by the taxpayer on the date of death and appearing on the T3 slips (covering 11 months in this example) constitute "rights or things" of the deceased? If not, who should be taxed on such income?
CRA responded:
Generally … to be a right or thing … the individual would have to be legally entitled to receive the amount at the time of the individual’s death (the right would have to exist) and the value of that right would have to be determinable at that time. …
By virtue of paragraph 138.1(1)(f), the taxable income of the related segregated fund trust is deemed for the purposes of subsections 104(6), (13) and (24) to be an amount that has become payable in the year to the beneficiaries under the segregated fund trust and the amount therefor in respect of any particular beneficiary is equal to the amount determined by reference to the terms and conditions of the segregated fund policy. …
We understand that, regardless of the method of income allocation used by the insurer, no amount is actually paid or payable to a related segregated fund policyholder in respect of income allocations made by the insurer. Those allocations are relevant for tax purposes only, given the rule in paragraph 138.1(1)(f) and the application of subsections 104(6), 104(13) and 104(24). However, they do not create any right to receive an amount to the policyholders. The same applies to capital gains deemed to be the earnings of a related segregated fund policyholder by virtue of subsection 138.1(3).
Consequently, income and capital gains allocated to a related segregated fund policyholder in accordance with the terms of the policy … are not rights or things for the purposes of subsection 70(2) … .