2021-0882401E5 Immigration and foreign life insurance policy

Principal Issues: In a scenario where section 128.1 applies, would subsection 70(5.3) apply to deem the fair market value of a foreign life insurance policy to be its cash surrender value?

Position: General comments provided.

Reasons: Generally, subsection 70(5.3) assigns a life insurance policy a fair market value equal to the policy’s cash surrender value only when determining the fair market value of any property that is deemed to have been disposed of by an individual for purposes of subsections 70(5) and 104(4) and section 128.1 of the Act.

Author: Szilagyi, Steven
Section: 70(5), (5.3), 104(4), 128.1(1), 148(9)

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                                                                                         2021-088240
                                                                                         S. Szilagyi

February 17, 2022

Dear XXXXXXXXXX:

Re: Immigration of a Non-Resident Person owning a Foreign Life Insurance Policy

We are writing in response to your correspondence dated February 24, 2021 wherein you requested our comments regarding the determination of the fair market value (FMV) of a foreign life insurance policy under subsection 70(5.3) of the Income Tax Act (the “Act”) when a taxpayer immigrates to Canada. We apologize for the delay of our response.

In your correspondence, you have described the following situations:

1. A non-resident individual becomes resident in Canada at a particular time. The individual owns shares of the capital stock of a non-resident corporation (Foreignco A). Foreignco A is the policyholder of a foreign life insurance policy on the life of the immigrating individual.

2. A non-resident corporation (Foreignco B) becomes resident in Canada at a particular time. Foreignco B is the policyholder of a foreign life insurance policy on the life of a non-resident individual.

Our Comments

This technical interpretation provides general comments about the provisions of the Act and related legislation. It does not confirm the income tax treatment of a particular situation involving a specific taxpayer but is intended to assist you in making that determination. The income tax treatment of particular transactions proposed by a specific taxpayer will only be confirmed by this Directorate in the context of an advance income tax ruling request submitted in the manner set out in Information Circular IC 70-6R11, Advance Income Tax Rulings and Technical Interpretations.

Section 128.1 of the Act applies where, at a particular time, a taxpayer becomes or ceases to be resident in Canada. Generally, paragraph 128.1(1)(b) of the Act deems the taxpayer to have disposed of each property owned by the taxpayer at the time (referred to as the “time of disposition”) that is immediately before the time that is immediately before the particular time for proceeds of disposition equal to the property's FMV. Moreover, paragraph 128.1(1)(c) of the Act deems the taxpayer to have acquired at the particular time, each property deemed by paragraph 128.1(1)(b) to have been disposed of by the taxpayer, at a cost equal to the proceeds of disposition of the property. If the taxpayer is an individual becoming resident in Canada, certain types of properties, described in subparagraphs 128.1(1)(b)(i) to (iv) of the Act, are excluded from the deemed disposition. Such properties generally include an interest of the individual in a life insurance policy in Canada, other than the part of the policy deemed under paragraph 138.1(1)(e) of the Act to be the individual’s interest in a related segregated fund trust.

Under subsection 70(5.3) of the Act, where property (such as shares of the capital stock of a foreign corporation) is deemed to have been disposed of by a particular individual as a consequence of the particular individual’s death or the particular individual becoming or ceasing to be resident in Canada, and there is a life insurance policy under which the particular individual (or any individual with whom the particular individual does not deal at arm's length) is a person whose life is insured, the FMV of the property deemed to have been disposed (e.g., the shares of the capital stock of a foreign corporation) is determined as though the FMV of the life insurance policy were the policy's cash surrender value (as defined in subsection 148(9) of the Act) immediately before the particular individual died or became or ceased to be resident in Canada, as the case may be. In other words, subsection 70(5.3) of the Act assigns the life insurance policy a FMV equal to the policy’s cash surrender value only when determining the FMV of any property that is deemed to have been disposed of by an individual for purposes of subsections 70(5) and 104(4) and section 128.1 of the Act.

In our view, subsection 70(5.3) of the Act would apply to the first-described situation above for the purpose of determining the FMV of the Foreignco A shares owned by the individual at the time of disposition referred to in paragraph 128.1(1)(b) of the Act. In this regard, the FMV of the Foreignco A shares owned by the non-resident individual would be determined as though the FMV of the corporate-owned foreign life insurance policy were the policy’s cash surrender value.

However, in our view, subsection 70(5.3) of the Act would not apply to the second-described situation above, with respect to determining the FMV of the corporate-owned foreign life insurance policy to the corporation for purposes of section 128.1 of the Act upon the corporation becoming resident in Canada. The foreign life insurance policy would be valued in accordance with normal valuation practices taking into consideration all facts relevant to the particular case. In this regard, paragraphs 40 and 41 of Information Circular 89-3, Policy Statement on Business Equity Valuations, provides more information on the valuation of corporate-owned life insurance.

We trust our comments will be of assistance.

Yours truly,





Bob Naufal
Manager
Financial Institutions Section
Financial Industries and Trusts Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch

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