Life insurance policy – rollover at cost?
In a recent technical interpretation, the Canada Revenue Agency (“CRA”) confirmed that where a spousal trust is required to pay the life insurance premiums on a policy it owns and is the beneficiary of the policy, a rollover at cost pursuant to the relevant section of the Income tax Act (“ITA”) is not available on the original transfer of assets to the trust. The trust paying the premiums would mean that a person other than the spouse or common-law partner beneficiary would benefit from the income or capital of the trust which would offend a requirement for a rollover at cost pursuant to the ITA.
And what happens when the second spouse dies?
In another recent technical interpretation, the CRA reviewed the winding-up of a spousal trust. Mrs. X was the beneficiary of the spousal trust which owned 100% of the shares of Investco which held a GIC. Mrs. X died, and the trust terms directed that the remaining assets be divided between her two children. Investco was wound up triggering a deemed dividend and a capital loss which was carried back to offset the trust’s capital gain arising from the deemed disposition occurring on the death of Mrs. X.
The CRA did take the view that whether the deemed dividend constitutes income for the trust and whether the income is payable to the beneficiaries are questions of fact.
Nevertheless, where the trust indenture allows the trustee to pay, or make payable to the beneficiary, an amount equal to the deemed dividend, the CRA will generally allow a deduction in the trust in respect of these deemed dividends. This will be permitted provided the trustee exercises his power by the end of the trust’s taxation year and the amount paid or payable is not in return for the beneficiary’s capital interest in the trust.