Principal Issues: Whether subsection 107(2) takes precedence over subsection 148(7) where a personal trust distributes an interest in a life insurance policy to its capital beneficiary and there is a resulting disposition of all or any part of the beneficiary's capital interest in the trust?
Position: Yes.
Reasons: The prior commentary remains unchanged.
FINANCIAL STRATEGIES AND FINANCIAL INSTRUMENTS ROUNDTABLE, 10 OCTOBER 2024
2024 APFF CONFERENCE
Q.10 Trust’s distribution of life insurance policy to its beneficiary
In Question 4 (footnote 1) of the 2023 APFF Financial Strategies and Instruments Roundtable, CRA stated that where a personal trust transfers an interest in a life insurance policy to its beneficiary, as payment of a dividend in kind received by the trust, pursuant to subsections 104(6), 104(13) and 104(24) (and where designated pursuant to subsection 104(19)), in full or partial satisfaction of the beneficiary's interest in the income of the trust, subsection 106(3) could apply. In such a situation, subsection 106(3) deems the trust to dispose of the interest in the life insurance policy for proceeds equal to its FMV.
In addition, the CRA stated that subsection 148(7) could also apply in that situation. The CRA indicated that, to the extent that it is determined that, on the disposition of the beneficiary's interest in a life insurance policy, the beneficiary's income interest in the trust includes the right to require the trust to pay an amount equal to the FMV of that interest in the life insurance policy, the portion of the beneficiary's income interest in the trust that is satisfied for the interest in the life insurance policy would have a FMV equal to the FMV of that interest. In this context, the same consequences arising from the disposition of the interest in the life insurance policy to the trust and its beneficiary would be recognized, regardless of which of subsections 106(3) or 148(7) would prevail.
However, on several past occasions, (footnote 2) the CRA has stated that subsection 107(2) would prevail over subsection 148(7) where an interest in a life insurance policy held by a personal trust is distributed to a beneficiary resident in Canada in full or partial satisfaction of the beneficiary's capital interest, which would allow a tax-deferred rollover provided that subsection 107(4.1) does not apply to the distribution.
Question to the CRA
Can the CRA confirm that the commentary in those technical interpretations, that subsection 107(2) takes precedence over subsection 148(7), is still valid?
CRA Response
In several technical interpretations (footnote 3) the CRA has indicated that the distribution by a personal trust of an interest in a life insurance policy to its Canadian resident beneficiary in full or partial satisfaction of its capital interest in the trust would generally be made pursuant to subsection 107(2) so that the interest could be distributed from a trust to its capital beneficiary without any immediate tax consequences where all the conditions of that subsection are satisfied. Those technical interpretations indicated that subsection 107(2) would prevail over subsection 148(7) with respect to the distribution by a trust of the interest in the life insurance policy to its capital beneficiary. That comment is still valid and should generally continue to apply to the distribution by a personal trust of an interest in a life insurance policy to its beneficiary that gives rise to a disposition of all or part of that beneficiary's capital interest in the trust pursuant to subsection 107(2).
Nathalie Boyer
10 October 2024
2024-102733
FOOTNOTES
Note to reader: Because of our system requirements, the footnotes contained in the original document are shown below instead:
1 CANADA REVENUE AGENCY, Technical Interpretation 2023-0990531C6, November 3, 2023.
2 CANADA REVENUE AGENCY, Technical Interpretation 2011-0391781E5, January 18, 2012, CANADA REVENUE AGENCY, Technical Interpretation 9908430, May 11, 1999 and CANADA REVENUE AGENCY, Technical Interpretation 9641405, March 2, 1998.
3 Id.