2024-1007101C6 2024 CALU RT - Q3 - Transfer of policy to child

Principal Issues: Whether subsection 148(8) applies to the transfer of a joint-last-to-die policy by a parent to the surviving spouse of a deceased child. In the scenarios described, the child and spouse were the measuring lives under the joint-last-to-die policy.

Position: In each described scenario, subsection 148(8) applies to the transfer of the policy from the parent to the child.

Reasons: At the time of the transfer, the child is the only life insured under the policy.

Author: Estabrooks, Karri Lea
Section: 148(8)

CALU Roundtable – May 2024

Question 3 – Subsection 148(8) -Transfer of an insurance policy from a parent to child

Background

The Income Tax Act (Act) contains rules for transfers of insurance policies to a “child” of the transferor on a non-taxable basis. The general rule, under subsection 148(8) of the Act, provides that where a policyholder transfers an interest in the policy to the policyholder’s child for no consideration and a child of the policyholder or a child of the transferee is the person who is insured under the contract, the policyholder shall be deemed to have disposed of his or her interest in the policy for proceeds of the disposition equal to the adjusted cost basis (ACB) of the policy immediately before the transfer. The transferee will acquire the policy at a cost equal to those proceeds (i.e., the policy’s ACB).

The CRA opined, in document 9618075 dated September 3, 1996, that subsection 148(8) of the Act can apply in a situation where a policyholder’s interest in a life insurance policy on the life of a child of the policyholder is transferred to the policyholder’s child on the death of the policyholder by virtue of a successive owner designation made under subsection 199(1) of the Insurance Act (Ontario).

The definition of “child” takes its meaning from section 252 as well as subsection 70(10) of the Act. A child includes a grandchild/great-grandchild as well as a spouse or common-law partner of a child of the taxpayer.

Subsection 70(10) was amended in 2014 to include “a person who was a child of the taxpayer immediately before the death of the person’s spouse or common-law partner.”

As noted, the rollover only applies where a child of the policyholder or a child of the transferee is the life insured under the policy. The CRA has issued several interpretations which discuss this requirement. For example,

* In document 2004-0065441C6 dated May 4, 2004, the CRA opined that the rollover will not be available where there is more than one life insured under the policy even if all the insured lives met the definition of a child for purposes of subsection 148(8) of the Act.

* In document 2005-0116681C6 dated May 3, 2005, the CRA opined that the rollover will be available in circumstances where there is a joint-last-to-die policy on the life of a parent and child, and the policy was transferred to the child for reason only that the child is the named contingent owner of the policy within the meaning of 199(1) of the Insurance Act (Ontario) on the parent’s death and the child is the only life insured under the policy at the time of the transfer.

Question

We have the following scenarios and questions.

Parent A acquires and is the sole policyholder of a joint-last-to-die life insurance policy (the Policy) on the life of Child B and Child B’s spouse (B’s Spouse). Child B dies and the policy remains in force, with B’s Spouse being the sole life insured.

(1) Subsequent to Child B’s death, Parent A transfers the Policy to B’s Spouse for no consideration. Can the CRA confirm that the Policy is deemed to have been disposed of for proceeds of the disposition equal to the ACB of the Policy to Parent A immediately before the transfer pursuant to subsection 148(8) of the Act?

(2) Subsequent to Child B’s death, Parent A names B’s Spouse as the contingent owner of the policy upon death, within the meaning of subsection 199(1) of the Insurance Act (Ontario). Can the CRA confirm that the Policy is deemed to have been disposed of for proceeds of the disposition equal to the ACB of the policy to Parent A immediately before death pursuant to subsection 148(8) of the Act?

CRA Response

Subsection 148(8) of the Act provides that, where certain conditions are satisfied, a policyholder may transfer a life insurance policy to another person at the ACB of the policy. The first condition is found in paragraph 148(8)(a) of the Act, which requires that the interest of a policyholder in a policy be transferred to a “child” (as defined in subsections 70(10) and 252(1) of the Act) of the policyholder for no consideration. The second condition is found in paragraph 148(8)(b) of the Act, which requires that the life insured, under the policy being transferred, must be a child of the policyholder or a child of the transferee.

It is our general view that the fact that there was more than one life insured under the policy when issued, will not preclude the policy from being transferred at its ACB pursuant to subsection 148(8) of the Act, provided that, at the time the policy is transferred, there is only one life insured under the policy who is the child of the policyholder or the child of the transferee.

In Situation (1), it is our view that subsection 148(8) of the Act would apply to the transfer of Parent A’s interest in the Policy to B’s Spouse, as B’s Spouse is the child of Parent A by virtue of paragraph (b.1) of the definition of child in subsection 70(10) of the Act. Accordingly, the interest in the Policy would be deemed to have been disposed of by Parent A for proceeds of the disposition equal to Parent A’s ACB of the interest immediately before the transfer, and B’s Spouse will be deemed to have acquired the interest in the Policy at a cost equal to those proceeds.

In Situation (2), if B’s Spouse (who is a child of Parent A) receives Parent A’s interest in the last-to-die policy on Parent A’s death for reason only that B’s Spouse is the contingent owner of the policy within the meaning of 199(1) of the Insurance Act (Ontario), it is our view that B’s Spouse is the only life insured under the policy at the time Parent A’s interest in the Policy is transferred to B’s Spouse. Provided that B’s Spouse acquired this interest without consideration, it is our view that subsection 148(8) of the Act would apply to the transfer of the interest in the Policy from Parent A to B’s Spouse, such that Parent A would be deemed to have disposed of the interest in the Policy for proceeds of the disposition equal to Parent A’s ACB of the interest immediately before the transfer, and B’s Spouse will be deemed to have acquired the interest in the Policy at a cost equal to those proceeds.

Karri Lea Estabrooks
2024-100710
May 7, 2024

All rights reserved. Permission is granted to electronically copy and to print in hard copy for internal use only. No part of this information may be reproduced, modified, transmitted or redistributed in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, or stored in a retrieval system for any purpose other than noted above (including sales), without the prior written permission of Canada Revenue Agency, Ottawa, Ontario K1A 0L5.

© His Majesty the King in Right of Canada, 2024

Tous droits réservés. Il est permis de copier sous forme électronique ou d'imprimer pour un usage interne seulement. Toutefois, il est interdit de reproduire, de modifier, de transmettre ou de redistribuer de l'information, sous quelque forme ou par quelque moyen que ce soit, de façon électronique, mécanique, photocopies ou autre, ou par stockage dans des systèmes d'extraction ou pour tout usage autre que ceux susmentionnés (incluant pour fin commerciale), sans l'autorisation écrite préalable de l'Agence du revenu du Canada, Ottawa, Ontario K1A 0L5.

© Sa Majesté le Roi du Chef du Canada, 2024