Principal Issues: [Taxinterpretations translation] There are Joint-last-to-die policies for which the cost of insurance ceases on the first death. Such a policy remains in force without premiums being payable and the benefit is collectible on the second death (that of the beneficiary spouse of the trust). For purposes of subparagraph 70(6)(b)(ii) of the Act, can the CRA confirm that a policy containing this type of endorsement suspending the payment of premiums throughout the spousal holding in favor of the spouse would not in itself disqualify it as a trust to the spouse?
Position: Assuming that the ownership of the exempt insurance contract, following the death of the testator who is the policy buyer and holder, has been lawfully transferred to this trust and that the latter has not (or its trustees) disbursed any amount out of the income or capital of the trust to maintain the policy in force and that no other person, other than the surviving spouse or common-law partner, may, before the death of the spouse or common-law partner , receive or obtain any part, if applicable, of the income or cash surrender value of this policy, it appears to us that the condition of subparagraph 70(6)(b)(ii) would be met.
Reasons: The CRA is of the view that the obligation to fund a life insurance policy out of the capital or income of a trust would be one under which a person other than the surviving spouse or common-law partner may obtain the use of any part of income or capital for the purposes of subparagraph 70(6)(b)(ii).
Financial Strategies and Financial Instruments Roundtable, 5 October 2012
2012 APFF Conference
Question 1 - Spousal Trust and Life Insurance Policy
Further to comments on question 2.1 at the CALU Roundtable in May 2012 regarding the holding of a life insurance policy by a spousal trust on the life of the spouse, the Canada Revenue Agency ("CRA") expressed the opinion that the financing of such a policy out of the capital or income of the trust (the payment of premiums) could contaminate the spousal trust. In support of this position, subparagraph 70(6)(b)(ii) of the Income Tax Act (footnote 1) provides that "... no person except the spouse or common-law partner may, before the spouse’s or common-law partner’s death, receive or otherwise obtain the use of any of the income or capital of the trust.”
There are joint last-to-die policies for which the cost of insurance ceases on the first death. Such a policy remains in force without premiums being payable and the benefit is collectible on the second death (that of the spouse of the spousal trust).
The buyer and holder of the exempt policy is the testator taxpayer. The beneficiary of the policy is the testamentary trust. A legacy by particular title or subrogated designation is made to that testamentary trust following the death of the testator taxpayer. During the testator’s lifetime, premiums are paid by this taxpayer. They cease to be payable at the first death. The following facts are proposed:
- The testator taxpayer contracted for an exempt joint life insurance policy on the testator’s life and that of the testator’s spouse, which was payable on the second death. That policy was subject to the laws of Quebec. On the death of the testator, to the extent that the the testator’s spouse was not predeceased, the policy remained in force since there was still an insured person under the contract and the testator’s property was transferred, following the testator’s death, to the trustees of a testamentary trust for the benefit of the spouse that the testator had established by will in accordance with the provisions of the Civil Code of Québec ("CCQ"). Assume that the will of the testator taxpayer included a universal legacy in favour of that spousal trust and on the spouse’s death, the remaining balance (after in particular the payment of the taxes payable) was paid to children’s trusts (also created under the terms of the testator taxpayer's will).
- The insurance coverage provided that at the first death, premiums ceased to be payable. The policy remained in effect as long as the second death did not occur. In the event that the ownership of the insurance contract, following the first death, had been duly transferred to a spousal trust, the latter did not have to pay any amount in order to keep the policy in force. Throughout the life of the spouse, the trust held this property without any income being generated. Furthermore, no trust income would be allocated for its maintenance, since no premium was payable.
In the context where such an exempt policy on the life of a taxpayer and spouse is transferred to a spousal testamentary trust, the holding of that policy would not have the effect of contaminating that trust because no money from such a trust would be used to maintain and keep this policy in effect. Thus, no one other than the spouse or common-law partner would indirectly receive the use of a trust asset.
For purposes of subparagraph 70(6)(b)(ii), can the CRA confirm that a policy containing this type of endorsement for the suspension of the payment of premiums throughout the period of its holding by a spousal trust would not in itself disqualify it as a spousal trust?
CRA Response
As discussed in question 2.1 at the CALU Roundtable in May 2012, the CRA is of the view that the obligation to fund a life insurance policy out of the capital or income of a trust is one under which a person other than the surviving spouse or common-law partner may obtain the use of any part of the income or capital for the purposes of subparagraph 70(6)(b)(ii). The reason is that payment of the premium is presumed to maintain, for the period covered by the premium, the rights to receive the insurance product by the beneficiary of the policy, which will never be the surviving spouse or common-law partner.
It is a question of fact whether the terms of a trust satisfy the condition of subparagraph 70(6)(b)(ii). In this case, the policy or endorsement described in the example was not provided to us for an analysis of the tax implications. Assuming that the ownership of the insurance contract, following the death of the testator who was the policy buyer and holder, has been lawfully transferred to that trust and that the latter (or its trustees) has not disbursed from the income or capital of the trust to maintain the policy in force and no other person, other than the surviving spouse or common-law partner, can, before the death of the spouse or common-law partner, receive or obtain any portion, if any, of the income or cash surrender value of this policy, it appears to us that the condition of subparagraph 70(6)(b)(ii) would be satisfied.
Danielle Bouffard
(613) 590-2155
October 5, 2012
2012-045312
FOOTNOTES
Due to our system requirements, footnotes contained in the original document are reproduced below:
1 R.S.C., 1985, c. 1 (5th Supp.) as amended (the “Act”).