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At the CALU Annual Meeting on May 8, 2012, Roger Filion, Director, Financial Industries, Canada Revenue Agency (CRA), responded to various questions of current concern to CALU members. The CRA's official responses to the questions, along with CALU commentary where appropriate, are provided in this issue of CALU Report.
CALU would like to thank Roger Filion and Jillian Welch, Partner, Wilson & Partners LLP, CALU's Tax Advisor, for their participation in the Roundtable.
Table Of Contents
Question 1.1
The CRA indicated at the 2010 CALU Roundtable that it was reviewing its position expressed in paragraph 27 of Interpretation Bulletin IT-470R, Employees' Fringe Benefits Consolidated. Can the CRA provide an update on its review?
CRA's Response
Paragraph 27 of Interpretation Bulletin IT-470R outlines the administrative position of the CRA concerning non-taxable commissions received on personal sales, and states, in part:
...where a life insurance salesperson acquires a life insurance policy, a commission received by that salesperson on that policy is not taxable provided the salesperson owns that policy and is obligated to make the required premium payments thereon.
We have considered the views set out in the July 6, 2010, joint submission from CALU and Advocis, and we have concluded that the administrative position set out above should not be changed at this time.
The objective of the administrative position in paragraph 27 of IT-470R is to reduce the compliance burden of businesses with respect to relatively small employee discounts and commissions. As we have previously indicated, it is not intended to permit the tax-free receipt of significant employment remuneration or other income. Furthermore, we have previously indicated that the administrative position is not intended to apply where the insurance was obtained for investment or business purposes. Accordingly, where based on the circumstances of a particular situation, the CRA is of the view that the amount of commission income is significant, or the particular life insurance policy has an investment component or a business use, the above-described administrative position will not apply.
CALU Comment: The CRA appears to have accepted CALU's recommendations set out in the joint submission and CALU will continue to monitor the CRA's administrative position as set out in Interpretation Bulletin IT-470R relating to the taxation of insurance commissions on personally owned insurance policies. However, as noted in the CRA's response, there are a number of caveats to its current position and CALU members should consult with their tax advisor on the tax treatment of insurance commissions arising in any particular situation.
Question 1.2
The Income Tax Rulings Directorate has announced that it will be updating the technical content and improving the functionality of Interpretation Bulletins through the creation of a replacement technical tax publication called the Income Tax Folios. Various stakeholders were canvassed to obtain feedback regarding which Bulletins would be priorities for update.
Could you comment on the priority status of the following seven Bulletins identified by CALU in its response to this feedback request:
CRA's Response
The Income Tax Rulings Directorate recognizes the value in being able to consult an authoritative source of technical tax information and the CRA's interpretation of the legislation it administers. Accordingly, the Income Tax Rulings Directorate has undertaken to review and improve the income tax technical publications product.
Although much of the information contained in the 272 active Interpretation Bulletins is out of date, it is impossible to update 272 Bulletins all at once. The process is expected to take a number of years. Of necessity, it was decided that the initial focus should be on the topics that are the most important to the most stakeholders. To make this determination, a number of indicators were considered. We checked the number of hits each Bulletin received over the past several years on the CRA website. We also gathered similar data from the various commercial tax publishers. Officials at numerous areas within the CRA as well as members of tax professionals' organizations in the private sector were consulted. All of this feedback and data permitted the identification of approximately 50 Bulletins to be addressed in the first several phases of the Folio Initiative.
Of the seven Bulletins specified in your question, IT-85R2, "Health and Welfare Trusts"; IT-447, "Residence of a Trust or Estate"; and IT-533, "Interest Deductibility" were among those that emerged as the most in demand by the most number of stakeholders.
We note that even priority topics will take time to address and specific timelines will depend on the complexity of the particular topic as well as available resources. However, as Folios are completed, they will be published and in keeping with the established practice, the related Bulletin will then be cancelled.
CALU Comment: We are pleased to see that the CRA will continue to update and release current Interpretation Bulletins albeit in a new format. As noted, several bulletins of interest to CALU members are on the priority list. More recently CALU has been invited to assist in the updating of other bulletins on our priority list with the expectation that this will speed up their final release by the CRA. We plan to form a working group to assist in identifying key bulletins and making the appropriate revisions.
Copyright the Conference for Advanced Life Underwriting, June 2012
Background
There may be circumstances where it is appropriate and desirable for an inter vivos or testamentary spousal trust to acquire, pay the premiums and/or be the beneficiary of an exempt life insurance policy on the life of the spouse. For example, the spousal trust may own assets, such as the shares in a private corporation, with significant accumulated capital gains that will be realized on the death of the spouse. Life insurance under which the spousal trust is the owner and/or beneficiary can ensure there is sufficient liquidity in the trust to pay any resulting taxes. This is particularly beneficial when the trust property is illiquid or the trust beneficiaries want the property to be retained and distributed in specie to them.
The following series of questions deal with the tax treatment of an exempt life insurance policy on the life of the surviving spouse where a spousal trust is both the owner and beneficiary of the policy, or is merely the beneficiary of such policy.
In TI 2006-0174041C6 and 2006-0185551C6 the following question was asked:
Question
If a testamentary trust is obligated to fund a life insurance policy on the life of the surviving spouse and the trust is the beneficiary of the policy, would this taint the trust and preclude it being a spousal trust pursuant to subsection 70(6) of the Act? If trust income is used to pay the premium, would this cause the trust to fall offside? If the trust capital is used to pay the premium, would this cause the trust to fall offside?
CRA's Response
For purposes of our reply we have assumed that the insurance policy is not an annuity or segregated fund contract and that the policy provides only benefits in respect of pure life insurance (i.e., benefits arising only on the death of the life insured) such that no part of the policy premium payments relates to any benefit other than pure life insurance protection.
Principles of insurance law and trust law both would apply in informing our understanding of the nature of the legal relations involved in the circumstances described in your question. These principles may vary from province to province. Therefore, to provide a detailed reply to your question we would require additional information, including:
We are prepared, however, to offer some general comments on the potential income tax consequences in the circumstances you describe.
We have limited our analysis to the application of subparagraph 70(6)(b)(ii) of the Act.
In order for property to be transferred on a tax-deferred ("rollover") basis from a deceased taxpayer to a trust, subparagraph 70(6)(b)(ii) requires that the trust be one under which no person except the surviving spouse or common-law partner ("survivor") of the taxpayer may, before the survivor's death, receive or otherwise obtain the use of any of the income or capital of the trust. Our position is that the mere possibility of a person other than the survivor receiving or obtaining, before the survivor's death, use of the trust capital or income is sufficient to disqualify the property transfer from the rollover.
A duty to fund a life insurance policy out of trust capital or trust income would, in our view, be one under which a person may obtain the use of the trust capital or trust income. This is because the premium payment is assumed to maintain, for the period covered by the premium, the rights to receive insurance proceeds. Therefore, the existence of such a trust term would be relevant in determining whether a rollover of property can occur to the trust under paragraph 70(6)(b) of the Act.
In the circumstances contemplated by your question, as a result of the duty to pay insurance premiums out of trust property it would appear that persons other than the survivor may, before the survivor's death, obtain the use of the trust income or capital. Therefore, we are of the view that the trust would not satisfy the conditions of subparagraph 70(6)(b)(ii) of the Act.
As a final comment, whether the trust is one that seeks to satisfy the requirement of paragraph 70(6)(b) of the Act or not, and whether the duty to pay the premium out of trust income or trust capital, it would appear that the policy beneficiary would have a benefit, from the trust's payment of the policy premium, resulting in the application of section 105 of the Act.
(Note: CRA TI 2008-030188, dated Oct. 9, 2009, confirmed that no benefit under subsection 105(1) arises for beneficiaries of a trust when the trust owns and is the beneficiary of a life insurance policy.)
Question 2.1
Could the CRA confirm who, other than the surviving spouse, it considers may be entitled to the capital or income of the trust before the surviving spouse's death, as a result of the duty on the trust to fund the life insurance policy? Would placing a positive duty on the trustee of a spousal trust to retain and maintain any property (e.g., a duty to retain the shares of a private corporation until the death of a survivor, or retain and maintain rental property until the death of the survivor) automatically taint an inter vivos or testamentary spousal trust?
CRA Response
In order for property to be transferred on a tax-deferred ("rollover") basis from a deceased person to a trust pursuant to paragraph 70(6)(b) of the Act, subparagraph (i) of that provision requires that the surviving spouse or common-law partner ("survivor") is entitled to receive all of the income of the trust that arises before the survivor's death, and subparagraph (ii) requires that the trust be one under which no person except the survivor may, before his or her death, receive or otherwise obtain the use of any of the income or capital of the trust.
As stated in documents 2006-0174041C6 and 2006-0185551C6, the CRA is of the view that a duty to fund a life insurance policy out of trust capital or trust income would be one under which a person other than the survivor may obtain the use of trust capital or trust income for purposes of subparagraph 70(6)(b)(ii). This is because the premium payment is assumed to maintain, for the period covered by the premium, the rights to receive the insurance proceeds by the policy beneficiary Ð which will never be the surviving spouse.
A trustee's duty to retain and/or maintain certain income-producing properties (e.g., shares of a private corporation or a rental property) is not, in our view, analogous to the payment of insurance premiums by the trustee to maintain rights to receive the insurance proceeds by the policy beneficiary after the death of the spouse. However, with that said, we would caution that it is always a question of fact whether the terms of any trust will meet the requirement of subparagraph 70(6)(b)(ii) of the Act.
Question 2.2
Assume that the trust document provides the trustees of an inter vivos or testamentary spouse trust with the ability to purchase an exempt life insurance on the life of the spouse (or jointly on the lives of the spouses in the case of an inter vivos trust) but there is no absolute obligation to purchase and retain such insurance.
Could the CRA confirm that if there is no "duty" on the trustees to acquire and/or fund life insurance on the lives of the spouses or the life of the surviving spouse and where such trust is the beneficiary of any insurance proceeds, that the trust is not "tainted" for purposes of the rollover of property under subsection 73(1) and subparagraph 70(6)(b)(ii) of the Act.
CRA's Response
For purposes of the rollover provisions in subsections 73(1) and 70(6) of the Act, subparagraphs 73(1.01)(c)(i) and 70(6)(b)(ii) of the legislation require the trust be a trust under which 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.
The CRA is of the view that the mere possibility of a person other than the survivor receiving or obtaining, before the survivor's death, use of the trust capital or income is sufficient to disqualify the property transfer from the rollover. This view is consistent, whether the trustee has an obligation or a mere power to encroach on the capital of a trust for the benefit of persons other than the surviving spouse or common-law partner.
Question 2.3
Assume Mr. B owns all the shares in a private corporation (Opco B) and these shares have a significant capital gain. Under Mr. B's will, on his death the shares are to be transferred to a testamentary spousal trust, and upon the death of Mrs. B, the trust is to hold and/or distribute the shares to the surviving children who are active in Opco B.
Opco B has acquired life insurance on the life of Mr. B and Mrs. B under which it is the beneficiary and premium payor. The purpose of the insurance is to create liquidity in the corporation on the death of the survivor of them, which may be accessed by the trustees of the spousal trust to fund taxes arising on the deemed disposition of the testamentary trust's assets including the shares of Opco B. The directors of Opco B have signed a resolution requiring Opco B to maintain the insurance policy until the death of the survivor, and to pay out the insurance proceeds to the testamentary trust as a capital and/or taxable dividend.
Could the CRA confirm that in these circumstances the insurance held by Opco B would not taint the testamentary trust for purposes of the rollover of property under subparagraph 70(6)(b)(ii) of the Act?
CRA's Response
The CRA is unable to confirm that such a structure would not taint the status of a testamentary trust and also impact on the rollover of property under subparagraph 70(6)(b)(ii) of the Act.
This determination is a question of fact and would require a review of all relevant factors.
Question 2.4
Assuming a positive response to Question 2.2 and/or 2.3, can the CRA confirm that its response will be the same if the owner of the insurance policy makes additional deposits to create a cash reserve that is accessible to the trust (in Question 2.2) or Opco B (under Question 2.3) on the disposition of the policy or added to the insurance proceeds upon the death of the life insured(s).
CRA's Response
As the CRA is unable to confirm its acceptance of the scenarios presented in either Question 2.2 or 2.3 in relation to the obligation to acquire or fund a life insurance policy in the circumstances, we are, therefore, unable to comment on the tax implications in a situation where the trust, or Opco B (in relation to scenario 2.3) as the owner of the insurance policy makes additional deposits to create a cash reserve accessible on the disposition of the policy or added to the insurance proceeds upon the death of the life insured(s).
Note, however, that we have previously opined that it is a question of fact as to whether a particular payment would result in a contribution to the trust for purposes of the definition of a testamentary trust in subsection 108(1) of the Act and it is our view that a contribution of property to a trust generally implies that the trust receives the property without any value being given to the contributor.
CALU Comment: This series of questions was designed to gain a better understanding of the CRA's position on the ownership of insurance within a testamentary trust and its potential impact on the rollover of property under subsection 70(6) of the Act. Unfortunately the CRA continues to be of the view that the trust ownership of insurance on the spouse's life results in someone other than the spouse being entitled to the use of any of the income or capital of the trust, prior to the death of the spouse. This view may, depending on the facts, also extend to circumstances where the insurance is held by a corporation which is controlled by the trust. The underlying rationale appears to be that the surviving spouse (and perhaps the trust itself if the beneficiary is changed to a third party) will not benefit from the insurance policy ownership and therefore income and capital is being "diverted" to other beneficiaries of the trust. However, we don't feel this position recognizes the fact that the insurance policy remains an asset of the trust while the spouse is alive and presumably can be surrendered or transferred for value, for the benefit of the spouse. We plan to have further discussions with the CRA with a view to demonstrating that their position is not reflective of the legal relationships that exist while the spouse is alive.
In the meantime, it is important to understand the implications of transferring or owning insurance within a testamentary trust where a rollover of other property is being contemplated. As discussed in Question 4 below, it may be appropriate to have the insurance owned by another person (including another trust) with the testamentary trust as beneficiary, to avoid a dispute with the CRA concerning the availability of the rollover.
Copyright the Conference for Advanced Life Underwriting, June 2012
Question
Could the CRA comment on Questions 2.2 - 2.4 in relation to the entitlement to the rollover of capital property in subsection 73(1) of the Act in the context of alter ego and joint partner trusts as described in subparagraph 73(1.01)(c)(ii) or (iii) and subsection 73(1.02) of the Act?
CRA's Response
Question 2 addressed the potential tax treatment in circumstances where an exempt life insurance policy on the life of the surviving spouse is held by a spousal trust where the spousal trust is both the owner and beneficiary of the policy, or is merely the beneficiary of such policy.
It is the CRA published view that a duty to fund a life insurance policy out of trust capital or trust income would be one under which a person may obtain the use of trust capital or trust income; and as such, the existence of such a duty would be relevant in determining whether a rollover of property can occur to the trust under subparagraph 70(6)(b)(ii) of the Act. This view would equally apply for purposes of the rollover provision in subsection 73(1) of the Act.
Further, as noted in our response to Question 2.2, this view applies consis-tently whether the trustee has an obligation or a mere power to encroach on the capital of a trust for the benefit of persons other than the surviving spouse or common-law partner. Please note however, that the specific questions asked of us in Questions 2.3 and 2.4 relate to questions of fact and cannot be confirmed without a detailed review of all relevant factors.
CALU Comment: The CRA essentially reiterates that its answers under Question 2 would also apply to alter ego and joint partner trusts. Please refer to the CALU commentary under Question 2.
Copyright the Conference for Advanced Life Underwriting, June 2012
Background
In CRA TI 2010-0358461E5, dated Dec. 15, 2010, the CRA was asked to consider whether the payment of insurance proceeds to the trustees of a testamentary spousal trust could "taint" the trust for purposes of the rollover under subsection 70(6) of the Act. The following sets out the specific question and response.
(Note: the underlined words are modifications from the original TI which contemplated two separate testamentary trusts).
Question
If a valid declaration affecting a life insurance policy on the life of the taxpayer provides that the proceeds thereof are payable to the named persons who are the trustees of the spousal testamentary trust and directs that the insurance proceeds are to be held by the trustees, and invested and distributed in accordance with the provisions in the will and that such proceeds are to be added to the capital of the trust, would the addition of the insurance proceeds into the trust fund of and by itself preclude the application of subsection 70(6) of the Act to other properties transferred to the trust?
CRA's Response
... if the proceeds of the insurance policy are validly designated in favour of the trustees and the trustees in that capacity and wholly in accordance with the terms of the designation add the proceeds to the capital of the trust, this would not, in our view, of and by itself preclude the application of subsection 70(6) to determine the tax consequences in respect of other properties transferred to the trust.
However, we would caution that the addition of the proceeds of the insurance policy to the capital of the trust could, depending on the circumstances, impact the trust's status as a testamentary trust. We would note that, pursuant to paragraph (b) of the definition of "testamentary trust" in subsection 108(1), a trust created after Nov. 12, 1981, would not be a testamentary trust if before the end of the taxation year, property has been contributed to the trust otherwise than by an individual on or after the individual's death and as a consequence thereof.
This may be a relevant consideration where, for example, the insured has not appointed the named persons in the insurance designation in their capacity as trustees of the estate or where the policyholder was not the taxpayer (bolding added).
Question 4.1
Assume that Mr. A and Mrs. A are the joint owners of a joint second-to-die insurance policy. The policy has provision for a death benefit to be paid on the first death of Mr. A and Mrs. A. Mr. A designates the trustees of a testamentary spousal trust as beneficiary for any insurance proceeds payable under this policy as a result of his death. Assuming that Mrs. A survives Mr. A, would the fact that insurance proceeds are paid to the testamentary trust and Mrs. A is the joint owner of the policy, preclude the application of subsection 70(6) of the Act to other properties transferred to the trust? Could you also confirm that such a trust would be considered a testamentary trust under subsection 108(1) of the Act?
CRA's Response
Similar to the position expressed in document 2010-035846, the CRA is of the view that if proceeds are paid out of a "joint second-to-die" insurance policy on the death of first policyholder and these proceeds are validly designated in favour of the trustees and the trustees in that capacity and wholly in accordance with the terms of the designation add the proceeds to the capital of a trust (as created pursuant to Mr. A's will or other testamentary instrument), this would not, of and by itself preclude the application of subsection 70(6) to determine the tax consequences in respect of other properties transferred to the trust on the death of Mr. A.
However, again we would caution that the addition of such a payment under the joint policy to the capital of the trust could, depending on the circumstances, impact the trust's status as a testamentary trust.
Question 4.2
In CRA Technical Interpretations TI 2008-0270421C6 and 2008-0278801C6, Q.2., the CRA provided the following guidance:
... a trust created pursuant to the individual's will or other testamentary instrument will not lose its testamentary trust status solely by reason of the receipt of the proceeds of an insurance policy on the life of that individual (who was the policyholder), where the trust is the designated beneficiary under the policy and the trust was not created or settled before the death of the individual.
In the case of a joint last-to-die life insurance policy where the only amount that is payable to the trust under the policy is paid on the death of the last of the two persons insured under the policy, our position would be the same Ð that is, a trust created from the receipt of the proceeds of such a policy will not lose its testamentary trust status solely by reason of the receipt of the proceeds of that insurance policy provided that the life insurance policy is owned by the individual who survives the other immediately before his or her death and the policy qualifies as a testamentary instrument of that person at that time.
Assume the same facts as under Question 4.1, and that Mrs. A has designated the trustees of the testamentary trust created under Mr. A's will to be the beneficiary of the insurance proceeds payable on her death. Will the receipt of the insurance proceeds on Mrs. A's death result in the trust losing its status as a testamentary trust?
CRA's Response
The definition of "testamentary trust" in subsection 108(1) of the Act sets out, in its preamble, the general requirement that to qualify as a testamentary trust in a taxation year, a trust must have arose on and as a consequence of the death of an individual. For a trust created after Nov. 12, 1981, paragraphs (a) and (b) of the definition then provide circumstances which, if they exist, will result in the trust not being a testamentary trust for purposes of the Act, despite meeting the words of the preamble.
Pursuant to paragraph (a), the trust will not qualify if it is created by a person other than the individual referred to in the preamble, who is the individual on whose death and as a consequence of, the trust arose. Paragraph (b) applies if at any time before the end of the taxation year, a contribution of property to the trust occurs which is not a contribution by an individual on or after that individual's death and as a consequence thereof.
Obviously, there exists a wide variety of insurance products available to serve many goals. Given this, the CRA would caution that the particular facts that may arise in respect of the scenario in this question could, depending on the unique policy terms, and related relationships of the parties to the insurance policy, result in the trust not meeting the testamentary trust definition.
Based on the wording in paragraph (b) of the testamentary trust definition, it appears that the Act contemplates the possibility of certain contributions to an existing testamentary trust by an individual other than the individual on whose death the trust first arose (i.e., as long as the subsequent contribution is as a consequence of the death of the contributor). It is worth noting that the points raised in document 2010-0358461E5, referred to in your question, remain valid. However, if:
then in our view, the receipt of the insurance proceeds on her death would not result in a loss of testamentary status of the trust.
CALU Comment: As discussed under Questions 2 and 3, the CRA has indicated that the roll over of property to a testamentary spousal trust or an alter ego/joint partner trust will be denied where trust funds are used to acquire a life insurance policy on the life of the spouse (or the settlor of the alter ego/joint partner trust). The CRA has in the past agreed that the trust will not be "tainted" where it receives insurance proceeds as a beneficiary. However, the CRA has also indicated that where the beneficiary is a testamentary trust, the receipt of the insurance proceeds could affect its status as testamentary trust. If this was to occur the trust would no longer have access to marginal tax rates and trust income would be taxed at the top marginal rate similar to an inter vivos trust. Question 4 explores several different scenarios involving joint policies and provides additional guidance on when the receipt of insurance proceeds may result in a testamentary trust losing that status (with the result that trust income is taxable at the highest marginal tax rate).<
Copyright the Conference for Advanced Life Underwriting, June 2012
Background
The 2011 federal budget contained two proposals that affect certain defined benefit Individual Pension Plans (IPPs). These proposals were part of Bill C-13 and are now law, with an effective date of March 22, 2011.
Regulation 8503(26) provides that affected IPPs will be required to pay out to a member, each year after the member attains 71 years of age, an amount equal to the greater of:
For IPP members who reach the age of 72 in 2011 or earlier, the required withdrawals will start in 2012. For IPP members who attain the age of 72 after 2011, the required withdrawals will start in the year in which they attain 72 years of age.
Regulation 8304(10) provides that for past service contributions made after March 22, 2011, the cost of certain past service benefits under the terms of the IPP must first be satisfied by transfers from RRSP and RRIF assets (as well as money purchase registered pension plan assets) belonging to the IPP member and then by a reduction in the member's unused RRSP contri-bution room, before the new past service contributions are permitted.
These new rules will apply to a defined benefit IPP (as defined in Regulation 8300(1)) that:
Questions
a) It is our understanding that the IPP minimum payment requirement may conflict with the legislation governing the terms and conditions of pension plans registered in certain provinces. Could the CRA comment on how they plan to deal with situations where provincial legislation may restrict the payment of the IPP minimum amount as required under Regulation 8503(26).
b) For the funding of past service benefits from an RRSP or RRIF, if the "designated savings arrangement" is a RRIF, it is our understanding that many financial institutions will not allow an inter-plan transfer without first disbursing the RRIF minimum for the year to the owner. This will result in a shortfall in the funds available to satisfy the PSPA. How will the CRA deal with this situation in relation to the funding of past service benefits?
CRA's Response
a) Subsection 8503(26) of the Income Tax Regulations requires an IPP to pay an annual amount, following the year in which the member attains 71 years of age, that is equal to the greater of the retirement benefits under the plan terms and the "IPP minimum amount." Failure to comply with subsection 8503(26) makes the particular plan a revocable plan and the Minister may issue a notice of intent to revoke the registration of the plan as set out in paragraphs 147.1(11)(c) and (l) of the Income Tax Act.
We would expect that the potential for conflict with pension benefits standards legislation will be somewhat limited as:
In cases where there is in fact a conflict, we suggest that the plan administrator seek a resolution by contacting the pension benefits standards regulator. CALU may also wish to pursue this matter further with the Department of Finance.
b) The Act does not contain a provision that permits a transfer to be made from a RRIF to a defined benefit provision of a registered pension plan. Similarly, paragraph 8502(b) of the Regulations does not include a provision to allow such transfers as permissible contributions to defined benefit registered pension plans. As a result, the funding of past-service benefits within a defined benefit provision of a registered pension plan (including IPPs) cannot be made via a transfer of property from a RRIF.
In addition, for the purposes of the PSPA calculation, we refer you to the definition of a qualifying transfer in subsection 8303(6) of the Regulations, which provides for the various transfers that may be used to offset a provisional PSPA associated with the crediting of past-service benefits.
In regards to IPPs, a provisional PSPA is calculated in accordance with new subsection 8304(10) of the Regulations. The IPP PSPA calculation is determined using the formula A Ð B.
Variable A is the greater of two amounts, described in paragraphs (a) and (b) respectively. The amount described in paragraph (a) is the provisional PSPA otherwise determined under subsection 8303(3) or 8304(5), calculated on the assumption that the provisional PSPA under that other subsection is not reduced by any qualifying transfers made in connection with the past service event.
The amount described in paragraph (b) is itself the lesser of two amounts. The first of these two amounts is, in general terms, the total of the fair market value of the assets held under the individual's "designated savings arrangements" plus the individual's unused RRSP room. "Designated savings arrangement" is a new definition in subsection 8300(1) that in general terms refers to an individual's RRSP, RRIF or money purchase account of a registered pension plan. The second amount is, in general terms, the amount of the actuarial liabilities associated with the past service.
Variable B is the amount of the individual's qualifying transfers made in connection with the past service event. An individual's qualifying transfers made in connection with a past service event are determined under subsection 8303(6).
To summarize, while property within a RRIF is considered to form part of an individual's "designated savings arrangements" for the purposes of the PSPA calculation in subsection 8304(10), there is nothing in subsection 8303(6), subsection 8304(10), or paragraph 8502(b) that suggests that a RRIF to defined benefit RPP transfer is required or permitted to fund the past-service benefits.
CALU Comment: The 2011 Federal Budget introduced new requirements for IPP contributions and minimum payments. As part of its submission to Finance, CALU noted several administrative concerns with the RRIF minimum payment requirement for plan members who are age 72 or older. In Question 5 we took the opportunity to canvass those issues in more detail and see if the CRA would provide any administrative relief. As can be seen from their response, the CRA doesn't feel it has any wiggle room and must administer the new regulations as enacted. CALU will continue to present these issues to Finance and is hopeful that it will obtain some amendments in the future.
Copyright the Conference for Advanced Life Underwriting, June 2012
Background
It is not uncommon for shareholders of a corporation to use a buy-sell arrangement which requires the corporation to acquire insurance to fund share purchase obligations under the arrangement. Further, to ease administration of the buy-sell once it has been triggered by the death of a shareholder, the parties may agree to use a third party as a bare trustee or agent to hold the insurance proceeds while the necessary transactions are carried out.
In the 1993 CRA View 9323775, the CRA commented that:
To be included in the determination of the CDA of a corporation the proceeds must be considered to be received by the corporation. If the amounts are received by a trust, other than a bare trust, and then distributed to the corporation, they are not considered to be insurance proceeds, rather they are a distribution from a trust....
A corporation can be considered to have received the proceeds of a life insurance policy which it owned and on which it paid the premiums where it directed the payments to a third party provided the corporation was the beneficiary under the policy. Also, if amounts are received by an agent of the corporation or trustee of a bare trust, of which the corporation is the settlor and beneficiary, the amounts would be considered to be received by the corporation. It would be a question of fact whether your arrangement constitutes an agency agreement, bare trust or any form of trust. Such a determination can be made only after a thorough review of all of the relevant agreements.
The CRA has on numerous occasions set out requirements for a trust to be considered a bare trust and thus effectively ignored for the purposes of the Act. The three key requirements are that:
Since 1993, subsection 104(1) of the Act has been amended to generally exclude from the definition of trust "an arrangement under which the trust can reasonably be considered to act as agent for all the beneficiaries under the trust with respect to all dealings with all of the trust's property."
Assume that a buy-sell agreement (the "Agreement") has been entered into between the shareholders of Corporation A and Corporation A, which requires Corporation A to repurchase the shares of a shareholder on death and to acquire life insurance on the lives of the shareholders for this purpose. The Agreement has detailed provisions relating to the appointment of a third party to act as trustee for the insurance proceeds (the "Insurance Trustee"). In particular, the Agreement provides that the Insurance Trustee must follow the actions outlined in the Agreement in terms of receiving, holding and disbursing the insurance proceeds and does not otherwise have any significant powers or responsibilities.
Question 6.1
Further assume Corporation A is named as the beneficiary of each life insurance policy, and would be contractually bound to pay any insurance proceeds over to the Insurance Trustee upon receipt. Would the CRA consider Corporation A to have received the insurance proceeds for purposes of its CDA calculation?
CRA's Response
A trust for the purposes of the Act is defined in subsection 104(1) of the Act. That subsection provides that, if the arrangement is one in which the trust can reasonably be considered to act as agent for all the beneficiaries under the trust with respect to all dealings with all of the trust's property and the trust is not a trust described in paragraphs (a) to (e.1) of the definition of trust in subsection 108(1) of the Act, the arrangement is deemed not to be a trust for the purposes of the Act.
A trustee can reasonably be considered to act as agent for a beneficiary when the trustee has no significant powers or responsibilities, the trustee can take no action without instructions from that beneficiary and the trustee's only function is to hold legal title to the property. In order for the trustee to be considered as the agent for all the beneficiaries of a trust, it would generally be necessary for the trust to consult and take instructions from each and every beneficiary with respect to all dealings with all of the trust property.
Thus if after a thorough review of all the relevant facts including but not limited to the Agreement, the Insurance Trustee can reasonably be considered to act as agent for Corporation A such that the arrangement is deemed not to be a trust for the purposes of the Act and the facts support a conclusion that Corporation A is the only beneficiary, then Corporation A may generally be considered to have received insurance proceeds for purposes of its capital dividend account. Furthermore, it is assumed that in order for Corporation A to be considered to have received the insurance proceeds, the contract requiring Corporation A to pay the insurance proceeds upon receipt to the Insurance Trustee (acting as agent) would not negate the legal entitlement of Corporation A to receive the insurance proceeds.
Question 6.2
Assume instead that Corporation A is named as the beneficiary of each life insurance policy, but has given an irrevocable direction to the insurer to pay the proceeds over to the Insurance Trustee upon the death of a shareholder. Would the CRA consider Corporation A to have received the insurance proceeds for purposes of its CDA calculation?
CRA's Response
In the situation described in Question 6.2 and after a thorough review of all the relevant facts including but not limited to the Agreement, if the Insurance Trustee can reasonably be considered to act as agent for its sole beneficiary Corporation A such that the arrangement is deemed not to be a trust for the purposes of the Act, Corporation A may generally be considered to have received insurance proceeds for purposes of its capital dividend account provided that the irrevocable direction given by Corporation A to the insurer would not in any way negate the agency relationship between Corporation A and the Insurance Trustee.
Question 6.3
Assume instead that the insurance policy names the Insurance Trustee as the beneficiary of the policy. The designation would refer to the Insurance Trustee, for example, "as beneficiary in trust as bare trustee for the Corporation," or simply to the Insurance Trustee without specific reference to its capacity as a bare trustee or agent. Would the CRA consider Corporation A to have received the insurance proceeds for purposes of its CDA calculation?
CRA's Response
In the situation described in Question 6.3 and after a thorough review of all the relevant facts including but not limited to the Agreement, if the Insurance Trustee can reasonably be considered to act as agent for its sole beneficiary Corporation A such that the arrangement is deemed not to be a trust for the purposes of the Act, Corporation A would generally be considered to have received insurance proceeds for purposes of its capital dividend account.
CALU Comment: There may be circumstances where a corporation wants to have a third party to administer life insurance policies that are in place to fund a corporate buy-sell arrangement, while also ensuring the corporation obtains the capital dividend account (CDA) credit. In Question 6 the CRA offers further clarity on the use of "bare trusts" or agency arrangements established under a buy-sell or other corporate arrangement. The CRA indicates in its responses that if the arrangement is properly structured as an agency, the insurance proceeds will be credited to the capital dividend account of the corporation.
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Background
At the 2010 CALU Roundtable, the CRA was asked about the tax consequences of an arrangement between a parent and subsidiary corporation where one was the policyholder and the other was the beneficiary of the policy. In considering the various fact patterns posed, the CRA commented that depending on the facts subsection 15(1) of the Act would or would not apply, but also commented that subsection 246(1) and section 9 or paragraph 12(1)(x) of the Act might apply.
Assume the following transactions:
1) Corporation A is a holdco that owns all of the shares of Corporation B, an opco. Corporation A has cash and wishes to invest it for the long term. Corporation B has decided to purchase key man insurance to protect itself from loss and to ensure maintenance of long-term debt covenants.
2) Corporation A and Corporation B decide to purchase together permanent life insurance policy on the life of the key man, and enter into an agreement under which they agree that:
Questions
Can the CRA please confirm the following are the tax results of this arrangement:
1) Corporation A will not have a shareholder benefit under subsection 15(1) of the Act, assuming that Corporation B pays the fair market value premium cost of insurance for its interest in the policy.
2) Corporation B will not be subject to an assessment under paragraph 9 or 12(1)(x) of the Act in respect of Corporation A's portion of the premium as a result of the reimbursement it receives from Corporation A. (As noted above, this assumes that Corporation A reimburses Corporation B for the fair market value premium cost of insurance for its interest in the policy).
3) Neither Corporation A nor Corporation B will be subject to an assessment under subsection 246(1) of the Act assuming each funds the fair market value premium cost of insurance for their respective interests in the policy.
CRA's Response
The questions request confirmation of the income tax result of a particular arrangement. Given the broad variations in insurance policies and products, the CRA has not adopted any general positions with respect to split dollar arrangements or other shared ownership arrangements. The terms and conditions of these contracts are so flexible that they can only be commented on by reviewing a specific life insurance contract and all the other related agreements which may form part of the particular split dollar arrangement.
However, the CRA has consistently expressed the view that where a life insurance policy is co-owned by a corporation and its shareholder (corporation or individual) pursuant to a split-dollar arrangement or other shared-ownership arrangement, there is a potential for the corporation to confer a benefit on that shareholder through the premium sharing arrangement. Where the premium paid by the shareholder is less than that which would be paid for comparable rights available in the market under a separate insurance policy, the corporation may be viewed as having conferred a benefit to the shareholder that could result in a shareholder's benefit for the purpose of subsection 15(1) of the Act.
In this context, in order to determine the application of subsection 15(1), subsection 246(1), section 9 or paragraph 12(1)(x) of the Act, each arrangement must be considered based on its own facts, on a case-by-case basis. Consequently, it is impossible to elaborate on the potential application of those provisions. Such a review would normally be undertaken only in the context of an advance income tax ruling request or an audit.
CALU Comment: Since the 2010 CALU Roundtable there has been much discussion and debate on the "best" way to structure corporate-owned insurance where there is a Holdco/Opco or Sisterco structure and there is a desire to split the ownership of the policy and the beneficiary designation. This question outlines another structure involving joint ownership of the insurance policy between a Holdco and Opco, under which they share the costs and benefits of the policy. The CRA indicated that the facts of each case needs to be examined to determine if subsection 15(1), subsection 246(1), section 9 or paragraph 12(1)(x) of the Act could apply. Despite this response, there is a general consensus that the shared ownership structure may be the best approach to splitting benefits between two related corporations in order to minimize adverse tax results.
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Where a taxpayer has assigned a life insurance policy (other than an annuity contract) as collateral for a loan, and the conditions of paragraph 20(1)(e.2) of the Income Tax Act (the "Act") are satisfied, the taxpayer is permitted to claim a deduction each year in respect of premiums payable under the policy. The deduction is limited to that portion of the lesser of the premiums payable for the year and the net cost of pure insurance (NCPI) in respect of the year that "can reasonably be considered to relate to the amount owing from time to time during the year by the taxpayer."
Section 308 of the Income Tax Regulations (the "Regulations") sets out the definition of NCPI for purposes of subparagraph 20(1)(e.2)(ii) and paragraph (a) of the description of L in the definition of "adjusted cost basis" (ACB) in subsection 148(9) of the Act. To simplify this definition, the NCPI for a year in respect of a taxpayer's interest in a life insurance policy is a formula consisting of an amount representing a prescribed cost of insurance multiplied by the amount by which the benefit on death in respect of the taxpayer's interest in the policy at the end of the year exceeds the accumulating fund or cash surrender value (depending on the method regularly followed by the life insurer) of that interest at the end of the year.
The 1991 Department of Finance Technical Notes to paragraph 20(1)(e.2) of the Act indicate that,
Where a taxpayer's taxation year does not correspond to the policy year, the premiums payable under the policy should be prorated on a reasonable basis to the taxation year. Similarly, the NCPI, which is determined by the insurer on a calendar year basis should be prorated on a reasonable basis to the taxation year.
Question
Assume a policyholder dies on December 1 and the conditions of paragraph 20(1)(e.2) of the Act were met prior to the time of death. It would appear that the formula in section 308 of the Regulations would determine the NCPI to be nil for the year as there is no benefit on death in respect of the policy-holder's interest at the end of the year, with the result that no amount would be deductible in respect of premiums that would have otherwise been deductible (i.e., premiums that reasonably relate to the period January 1 to November 30). This appears to contradict the 1991 Department of Finance Technical Notes which permit proration of premiums and NCPI amounts to determine the amount "that can reasonably be considered to relate to the amount owing from time to time during the year by the taxpayer" (i.e., for period preceding death).
Is the CRA prepared to provide administrative relief in this circumstance?
CRA's Response
For the purposes of subparagraph 20(1)(e.2)(ii) and paragraph (a) of the description of L in the definition of ACB in subsection 148(9) of the Act, the NCPI for a year in respect of a taxpayer's interest in a life insurance policy is computed under section 308 of the Regulations by reference to the benefit on death in respect of the taxpayer's interest at the end of the year. Since the NCPI is determined by the insurer on a calendar year basis, it is our general position as stated in paragraph 2 of Interpretation Bulletin IT-309R2, Premiums on life insurance used as collateral, that where the taxpayer's taxation year end does not correspond to the calendar year, the premiums payable under the policy should be prorated on a reasonable basis to the taxation year.
In the circumstance described, there is no benefit on death in respect of the taxpayer's interest at the end of the year. The result is that there is no NCPI, notwithstanding that premiums may have been payable on the policy during the period prior to death. It is our view that a legislative amendment would be required to provide for a deduction in respect of premiums relating to the period prior to death. A request for such an amendment would need to be made to the Department of Finance.
CALU Comment: The CRA's response reflects a strict interpretation of the rules relating to the determination of NCPI. It appears that a legislative amendment will be required to obtain a paragraph 20(1)(e.2) deduction in the year of the death of the life insured.
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Background
In TI 2009-0314871E5 issued March 3, 2011, the CRA indicated that if there are other benefits provided under a disability policy, and if those benefits are not accident and sickness insurance benefits, the plan would not qualify as a group sickness and accident insurance plan (GSAIP). Specifically, the CRA indicated that if the plan includes a return of premium benefit to the disability policies, it will not qualify as a GSAIP and the entire amount of employer-paid premiums would be taxable to the participating employees.
Question
Assume an employer institutes a GSAIP for its employees and acquires individual disability policies to fund the benefits under the plan. The terms of the GSAIP do not include any provision for the pay-ment of any amount to an employee if he or she does not become disabled in the relevant time period. The employer has the option to add a return of premium (ROP) benefit to the policies and chooses to add this feature and name itself as the beneficiary. The employer does not deduct any premium payable in respect of the ROP benefit.
Can the CRA confirm that in this situation the existence of the ROP benefits on the disability policies does not disqualify the plan as a GSAIP?
CRA's Response
It is our view that a "group sickness or accident insurance plan" for the purposes of paragraph 6(1)(a) of the Income Tax Act does not include a plan or contract of insurance that provides or could provide benefits other than sickness and accident benefits. Therefore, the existence of additional benefits, such as the ROP on policies, would disqualify the plan as a GSAIP. It does not matter whether the employer or the employee is the recipient of the ROP benefit.
CALU Comment: In the fact situation posed to the CRA, the employee accident and sickness plan only provided grouped disability benefits that would otherwise qualify the plan as a GSAIP. The fact that the underlying funding vehicle also included an ROP benefit should in our view not be relevant for purposes of determining the tax status of the plan itself. As noted by the CRA in paragraph 5 of IT-428 (Wage Loss Replacement Plans):
Where the arrangement involves a contract of insurance with an insurance company, the insurance contract becomes part of the plan but does not constitute the plan itself.
We plan to have further discussions with the CRA on this point.
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Background
Subsection 207.6(2) of the Act deems the RCA rules to apply to situations where
If the RCA rules apply, the person or partnership (i.e., the employer) that acquired the insurance policy will be deemed to be the custodian of an RCA and its interest in the policy will be considered the subject property of an RCA. The employer will have to pay Part XI.3 refundable tax in an amount equal to the amount deposited to the insurance contract. In such an event, both the insurance deposit and the payment of refundable tax are deductible to the employer.
There is no case law which provides guidance on when an interest of an employer in an insurance policy "may reasonably be considered to be acquired to fund, in whole or in part," in the context of subsection 207.6(2).
In CRA Document #9322475 (Sept. 16, 1993), the CRA made the following comments regarding the funding test:
Where retirement benefits are to be funded by an insurance policy and an employer acquires an interest in the policy, the policy and all relevant documentation would have to be reviewed to determine if that interest may reasonably be considered to have been acquired to fund, in whole or in part, those benefits. In our view, the fact that the employer's share of the premiums under the policy would represent only the pure cost of term insurance would not of itself necessarily decide the issue. For example, if the employee's share of the premiums under the policy are less than would be required to fund similar retirement benefits under a policy where the employee paid all the premiums, it would seem reasonable to conclude that the employer's share of the premiums would be funding at least part of the retirement benefits. If so, the employer's interest in the policy would in our view be deemed to be the subject property of a retirement compensation arrangement (RCA) by reason of subsection 207.6(2) of the Income Tax Act.
Question 10.1
1) Can the CRA provide an update as to any additional circumstances that might lead it to conclude that a life insurance policy can "reasonably be considered to be acquired to fund in whole or in part" so that subsection 207.6(2) applies?
2) As the test looks to the purpose for the acquisition of the policy, can the CRA confirm that this test is only applied at the time of the acquisition of the insurance policy? For example, assume a life insurance policy is acquired at a particular time by the employer, and subsequent to that time the employer becomes legally obligated to pay retirement benefits to an employee. Can the CRA confirm that the policy could not be deemed to be an RCA under subsection 207.6(2)?
CRA's Response
Some of the factors that we would consider in determining whether subsection 207.6(2) of the Act would apply to deem a life insurance policy held in connection with an employee retirement plan to be an RCA include:
We disagree with the proposition put forward in the second question. In our view, the RCA deeming rule can apply even where the life insurance policy is acquired before the retirement benefits become provided. For example, we would normally seek to apply the rule where the policy is acquired shortly before, or in contemplation of, the provision of retirement benefits. Ultimately, the determination of whether this rule applies in a particular situation is a question of fact that requires consideration of all of the circumstances.
Question 10.2
The definition of a "life insurance policy" includes an annuity contract and a segregated fund policy. Many segregated fund policies are structured so that they are also considered annuity contracts under the Act by providing for annuity payments after a specific maturity date or triggering event or by providing for the purchase of an annuity contract after such time. The CRA has confirmed in the past that subsection 207.6(2) can apply to annuity contracts.
Has the CRA considered whether subsection 207.6(2) could apply to segregated fund policies and if yes, in what circumstances?
CRA's Response
The CRA has not previously considered the RCA deeming rule in the context of segregated fund policies. However, since the definition "life insurance policy" in subsections 138(12) and 248(1) of the Act includes a segregated fund policy, we agree that such policies fall within the scope of the rule.
CALU Comment: The CRA response provides helpful clarification of when a corporate-owned insurance policy may be deemed to be an RCA arrangement. The CRA also indicates that an insurance policy may be deemed to be an RCA arrangement even if it is acquired prior to the employer becoming legally obligated to provide retirement benefits. Finally, the CRA confirmed that in the appropriate circumstances a segregated fund policy may be deemed to be an RCA arrangement.
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Background
Subsection 147.4(1) of the Act applies where an individual acquires ownership of an annuity contract in satisfaction of the individual's entitlement to benefits under a Registered Pension Plan (RPP). Subsection 147.4(1) provides that the individual is deemed not to have received an amount from the RPP as a result of acquiring the annuity and any amounts received under the contract are deemed to be amounts received under the RPP, but only where the following conditions are met:
In the historical technical notes that accompany subsection 147.4(1), the Department of Finance provides the following example of RPP annuity acquisition that is not considered to satisfy the conditions for the deeming rules in subsection 147.4(1) to apply:
On retirement, Catherine, a member of a defined benefit RPP is entitled to an indexed pension of $20,000 per year. Under the terms of the plan, Catherine is given the option of either transferring the value of her benefits to a locked-in RRSP (subject to the transfer limits) or acquiring from a life insurance company an indexed annuity of $20,000 per year. Catherine elects the annuity option, but foregoes the indexing in exchange for additional lifetime annuity payments of $5,000 per year (an option that was not provided for under the plan). Subsection 147.4(1) does not protect the acquisition of the annuity contract since it provides for rights that are materially different from those provided for under the RPP.
It is clear that subsection 147.4(1) requires that the annuity payout not be "materially different" from what the corresponding defined benefit RPP would have paid. In Compliance Bulletin No. 3, dated Feb. 3, 2006, the CRA reiterated this requirement.
In recent years, there have been situations (i.e., concerns about solvency) where plan members have been offered an opportunity to remove the commuted value of their entitlements from the plan. Some provinces, such as Ontario, recently amended their pension legislation to permit the payout of the commuted value.
Question 11.1
In circumstances where the commuted value of the pension is greater than the purchase price of an annuity (that has the same payout that was expected under the RPP), we understand that the CRA permits the excess (not the entire commuted value) to be paid out as a taxable lump-sum amount. The CRA commented on this at the 2009 RPP Practitioners' Forum. Can the CRA confirm that this is the CRA's administrative practice?
CRA's Response
The response provided at the 2009 RPP Practitioners' Forum continues to reflect the CRA's position. Briefly, where the payment of the excess is required by the governing pension benefits standards legislation, subparagraph 8502(d)(ix) of the Regulations permits the amount to be paid to the member as a taxable lump-sum. This is explained in more detail at www.cra-arc.gc.ca/tx/rgstrd/cnslttns/rpp_cq09-eng.html#q2
Question 11.2
There may be circumstances where the commuted value is not sufficient to purchase an annuity with the same payout. Will the CRA consider that the requirements of subsection 147.4(1) have been met in these circumstances so long as the entire commuted value was used to purchase an annuity contract?
CRA's Response
Yes. The fact that the annuity payments in this situation are less than the benefits provided under the plan will not in and of itself cause the annuity acquisition to lose the protection afforded by subsection 147.4(1) of the Act.
CALU Comment: The CRA's positive response to both questions will be welcomed by CALU members who practice in the area of registered pension plans. Further detail from the CRA on pension features such as indexing, and how precisely these need to be replicated by the annuity, is still requirer.
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Background
In the 2010 APFF Round Table on Taxation of Financial Strategies and Instruments, the CRA confirmed that a life insurance policy issued by a foreign insurer meets the definition of "specified foreign property" under section 233.3 of the Act. Consequently, a Canadian entity holding an interest in a life insurance policy issued by a foreign insurer with a cost amount exceeding $100,000 would be required to comply with the reporting requirements of section 233.3 of the Act.
At the 2011 APFF Round Table on Taxation of Financial Strategies and Instruments (Question 1) there was a follow-up question on whether the cost amount of an interest in a life insurance policy is the adjusted cost basis (ACB) as defined in subsection 148(9) of the Act, or whether it is the premiums paid.
CRA Response at 2011 APFF Round Table:
A "reporting entity" for a taxation year must file a form T1135, Foreign Income Verification Statement, within the prescribed time period pursuant to subsection 233.3(3) ITA. A "specified Canadian entity" is considered a "reporting entity" for a taxation year or fiscal period where, at any time (other than a time when the entity is non-resident) in the year or period, the total of all amounts each of which is the cost amount to the entity of a "specified foreign property" of the entity exceeds $100,000, in accordance with the definitions of these terms found in subsection 233.3(1) ITA.
The "cost amount" of the interest an owner holds in a life insurance policy at any given time will generally be determined in accordance with paragraph (f) of the definition of that term set out in subsection 248(1) ITA. Thus, it is the cost to the taxpayer of the property as determined for the purpose of computing the taxpayer's income, except to the extent that that cost has been deducted in computing the taxpayer's income for any taxation year ending before that time.
The term "cost" is not defined within the ITA. Furthermore, determination of the cost of property for the purpose of computing a taxpayer's income calls for an analysis of all the facts relevant to a particular situation. We are of the opinion, however, that the "adjusted cost basis" of the interest an owner holds in a life insurance policy, as defined in subsection 148(9) ITA, can generally be considered a reasonable valuation of the cost of the property for the purposes of the application of the rules set out in section 233.3 ITA.
Question
While the CRA's response provides some certainty to owners of foreign issued insurance policies, it still leaves the taxpayer with the very practical problem of determining the ACB of the policy. It is highly unlikely that a foreign insurer will be able to provide this information given the fact that certain elements of the ACB calculation (such as the annual net cost of pure insurance) are based on Canadian income tax rules. Could the CRA confirm their expectation of policyholders in determining the ACB of a foreign insurance policy? For example, would the CRA be satisfied with the policyholder making "best efforts" to determine the ACB of the policy by reviewing his or her own records and contacting the foreign insurer for additional information?
CRA's Response
The CRA would expect that the determination of the "cost amount" of a "specified foreign property" is made on the basis of all the information that can reasonably be obtained in a given situation. This would be a question of fact after a thorough review of the circumstances.
CALU Comment: It is important that CALU members be aware that the Canadian reporting requirement relating to foreign property extends to foreign issued insurance policies. This in turn can pose a challenge to value the insurance policy for purposes of these rules. Fortunately the CRA has acknowledged that a policyholder is only required to determine the "cost amount" of the policy based on the information that can reasonably be obtained.
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