M.D. Praulins (613) 957-2123
February 19, 1987
Dear XXXX
Re: Disposition of Life insurance Policy
This is in reply to your letter of December 11, 1986, and further to your telephone discussion with the author on February 5, 1987, in which you requested clarification of the disposition rules on life insurance policies that are "exempt policies".
In your letter you provided two examples. As the matters on which you have asked us to comment are essentially questions of fact rather than interpretations of the law we have adopted a general approach in our reply. If, after reviewing our comments you have a specific question about the application of Section 148 of the Income Tax Act (the "Act") to a particular situation, we suggest you write again setting out as much detail as possible.
Our Comments
The definition of "disposition" in paragraph 148(9)(c) of the Act states that a "...'disposition', in relation to an interest in a life insurance policy, includes ...", thus the provision is not intended to be an all-inclusive definition, but has been included in the legislation for greater certainty. It would appear to us that upon a switch of the life insured, the change in circumstances is so substantial that a new policy is in essence considered to have been issued.
Thus, a disposition occurs and the income of the policyholder is computed in accordance with the rules provided in section 148 of the Act.
We trust this is adequate for your purposes.
Yours truly
for Director Reorganizations and Non-Resident Division Specialty Rulings Directorate Legislative and Intergovernmental Affairs Branch