Subsection 148(2) - Deemed proceeds of disposition
Administrative Policy
19 March 1992 T.I. (Tax Window, No. 18, p. 21, ¶1822)
Where a policy holder provides standing instructions to make partial withdrawals from his savings account this, by itself, will not constitute the disposition or part disposition of an interest in the life insurance policy.
Subsection 148(7) - Disposition at non-arm’s length and similar cases
Administrative Policy
14 May 2015 CLHIA Roundtable Q. , 2015-0573821C6
Prior to a sale by Holdco of all the shares of Opco to an arm's length purchaser, Opco will transfer its interest in the Policy on the life of Mr. X (the sole shareholder of Holdco) to Holdco by way of a dividend-in-kind. The Policy has a nil ACB, $200,000 FMV, $100,000 CSV and $1,000,000 death benefit. CRA stated:
According to subsection 148(7), a corporation that holds an interest in a life insurance policy is deemed to have become entitled to receive proceeds of the disposition equal to the "value" of the interest where it disposes of such interest by way of a distribution to a person with whom it does not deal at arm's length. Where the interest in a life insurance policy includes an interest in the cash surrender value of the policy, subsection 148(9) provides that its "value" is equal to the [CSV].
14 May 2015 CLHIA Roundtable Q. , 2015-0573841C6
At the 2005 CALU Roundtable (2005-0116631C6), the CRA indicated that s. 69(5) would likely take precedence over s. 148(7) on the wind-up of a corporation under s. 88(2), so that a distributed interest in a life insurance policy would be disposed of at fair market value rather than cash surrender value. In confirming that this position "remains unchanged," CRA stated:
[T]he general rule is that where two provisions in the same statute conflict, the more specific provision should take precedence. … While we would generally expect subsection 69(5) to take precedence over subsection 148(7)… this approach is subject to a review of the particular facts and circumstances of an actual case… .
21 November 1991 T.I. (Tax Window, No. 13, p. 20, ¶1607)
Where a taxpayer, who owns a 1/4 interest in a life insurance policy transfers his interest to the other three owners with whom he does not deal at arm's length, his proceeds of disposition will be deemed to be 1/4 of the value of the policy (as defined in s. 148(9)(g)), at the time of disposition with the result that any deemed proceeds in excess of his ACB will be included in his income under s. 148(1) and s. 56(1)(j), and the other three policyholders will each add 1/3 of the deemed proceeds to the ACB of their respective interests.
Articles
David Louis, Michael Goldberg, "Life Insurance: Exploring the Corporate Edge - Part II", Tax Topics No. 1682, June 3, 2004, p. 1.
Subsection 148(8) - Idem [Disposition at non-arm’s length and similar cases]
Administrative Policy
5 June 2013 T.I. 2013-0481381E5 - Transfer of Life Insurance Policy
In confirming that the transfer of a life insurance policy jointly owned by the parents to their adult son whose life is insured under the policy would qualify for the rollover under s. 148(8), CRA stated:
The fact that the policy was jointly owned by the parents prior to the transfer would not, in and of itself, preclude the policy from being transferred at its adjusted cost basis….
15 February 1995 T.I. 943386 (C.T.O. "Disposition of Life Insurance Policy on Death")
S.148(8) does not apply where, on the death of a policyholder, the policy is transferred to the policyholder's child under the terms of the will of the deceased.
11 July 1989 T.I. (Dec. 89 Access Letter, ¶1059)
The rollover is not available on the transfer of a life insurance policy from a husband who is the basic life insured to his wife who was the additional life insured, because the wife was not the life insured under the policy.
Subsection 148(8.1) - Inter vivos transfer to spouse
Administrative Policy
10 December 1992 Memorandum (Tax Window, No. 27, p. 8, ¶2339)
Where a taxpayer has elected not to have s. 148(8.1) apply, s. 148(7) will apply. After the passage of Bill C-92, s. 148(8.1) will apply to a common-law spouse.
Subsection 148(8.2) - Transfer to spouse at death
Administrative Policy
10 December 1992 Memorandum (Tax Window, No. 27, p. 8, ¶2339)
Where an election is made not to have s. 148(8.2) apply, s. 148(7) will not apply because of the exclusion for dispositions deemed to occur pursuant to s. 148(2)(b). After the passage of Bill C-92, s. 148(8.2) will apply to a common-law spouse.
Subsection 148(9) - Definitions
Adjusted Cost Basis
See Also
Kratochwil v. The Queen, 2012 DTC 1084 [at 2917], 2012 TCC 45
The taxpayer, upon redemption of his life insurance policy, was unsuccessful in asserting that his adjusted cost basis was equal to the entire $127,368 he had paid in premiums under the policy to date. The taxpayer had failed to take into account that a considerable portion of his premiums had gone towards covering a $300,000 death benefit over the period in which he was insured.
Administrative Policy
3 June 2014 T.I. 2014-0524031E5 - Life insurance policy disposition
[T]he net cost of pure insurance (the "NCPI")… represents the cost the policyholder paid to be covered by insurance during the time he or she held the policy. The reduction of ACB by NCPI applies to life insurance policies acquired after December 1, 1982.
…In the case of a pre-December 2, 1982 life insurance policy, the full amount of the premiums paid is included in the calculation of the ACB and there is no reduction in respect of the NCPI. However, certain changes made to a pre-December 2, 1982 policy may cause it to lose this favourable treatment (e.g., where after December 1, 1982, a premium is paid under the policy which was not fixed on or before that date, and either (a) the policy is not an exempt policy, or (b) there has been a prescribed increase in any benefit on death under the policy).
18 February 2014 T.I. 2013-0515011E5 - Life insurance premiums and policy loan
A corporate policyholder and beneficiary of an exempt universal life policy on the life of one of its key shareholder pays the premiums on the policy and then receives a cash withdrawal from the policy, which the insurer advises is a policy loan. CRA provided a general discussion, including the following:
The ACB of a policyholder's interest in a life insurance policy is determined at any particular time by a formula under subsection 148(9) of the Act. In very general terms, the ACB will be the amount by which the cash premiums paid by the policyholder, and any income in respect of the policy that has previously been reported for tax purposes exceeds the net cost of pure insurance under the policy.
Furthermore, proceeds of the disposition in respect of a policy loan will reduce the ACB and a gain resulting from a policy loan will increase the ACB. Note that policy loan repayments that were not deductible under paragraph 60(s) of the Act (as described below) will be added to the ACB, to a maximum of the proceeds of the disposition in respect of the loan.
23 March 1992 T.I. 5-911717 -
Where one private company is the beneficiary of a life insurance policy taken out by a second holding company on the life of that second company's sole shareholder, the ACB of the policy to the first company would be nil because it was not the policy holder. Accordingly, the full amount of the insurance proceeds would be added to its capital dividend account.
12 November 1991 T.I. (Tax Window, No. 13, p. 5, ¶1592)
Where an individual owns a life insurance policy and pays the premiums, there will be no addition to the corporation's adjusted cost basis of the policy because that paragraph creates a cost base only for the policyholder.
Disposition
Administrative Policy
25 February 2003 T.I. 2002-013889 -
While not legally obligated to provide funding to terminally ill policyholders with a life expectancy of less than 24 months, life insurers are considering providing loans to such policyholders out of their general funds and receiving an assignment of the life insurance policy as security for the loan. The payment of the loan proceeds would not result in a disposition of the life insurance policy. (However, where such a loan is provided for under the terms and conditions of the life insurance policy, the loan would be a "policy loan" and would result in a disposition.)
August 1994 Memorandum 940797 (C.T.O. "Deferred and Prescribed Annuity Contracts")
Re: whether the conversion of a deferred annuity contract into a prescribed annuity contract would constitute a disposition of the deferred annuity contract.
31 January 1994 T.I. 933643 (H.A.A. 5720-1) (C.T.O. "Disability Benefitting Group Insurance Policy:)
An amendment to a group insurance policy to pay special disability benefits either as an advance or as a claim in itself would not result in a disposition of the policy provided the death benefit is reduced by the amount of the special benefit but is not otherwise altered, and there is no additional cost to the policyholder/employer or the insured.
19 March 1992, T.I. 920085 (April 1993 Access Letter, p. 150, ¶C144-206)
The furnishing of outstanding instructions or the making of an election by a policyholder with respect to future withdrawals would not normally constitute a disposition.
9 March 1994 T.I. 933379 (C.T.O. "Mortgage Insurance Cashback Program")
A payment received by a policyholder under a mortgage life insurance policy equal to 10 years of premiums paid under the policy will be considered to be proceeds of disposition of a part interest in the policy.
Policy Loan
Administrative Policy
3 July 1991 T.I. (Tax Window, No. 5, p. 15, ¶1333)
A loan made by an insurance company to a policy holder under a formal agreement similar to that used by a bank or trust company nonetheless would be considered to be a policy loan if the loan need not be repaid until the death of the insured, or where the loan agreement and the policy appear to be so interdependent as to constitute a single agreement.
Proceeds of Disposition
Administrative Policy
18 February 2014 T.I. 2013-0515011E5 - Life insurance premiums and policy loan
A corporate policyholder and beneficiary of an exempt universal life policy on the life of one of its key shareholder pays the premiums on the policy and then receives a cash withdrawal from the policy, which the insurer advises is a policy loan. CRA provided a general discussion, including the following:
The "proceeds of the disposition" of an interest in a life insurance policy is defined in subsection 148(9) of the Act as the amount of the proceeds that the policyholder is entitled to receive on the disposition. Where the disposition is the result of a policy loan, the proceeds of the disposition is the lesser of the following amounts:
- a) the amount of the loan, other than the portion of the loan used to pay a premium under the policy, as provided for under the terms and conditions of the policy, and
- b) the amount, if any, by which the cash surrender value of the policy before the loan was made exceeds the total of the balances outstanding at that time of any policy loans in respect of the policy.