The Income Tax Act allows a policyholder to transfer his or her interest in a life insurance policy on a child to that child or to another child of the policyholder. In these situations, the transfer is deemed to have occurred at the adjusted cost base of the policy.
The CRA is of the view that a rollover does not apply where the policy is transferred to a trust of which the child is a beneficiary. Without the benefit of the rollover, the transfer would be considered to be a disposition of the policy at its cash surrender value at the time of the transfer. The difference between the cash surrender value and the adjusted cost base of the policy may be taxable as income to the transferor.
Insurance is often purchased by a parent to provide for grandchildren in the event of a child’s death. Insurance is also purchased on a minor child’s life in order to obtain a policy while health is not an issue and the premiums are low.
Surprises happen. The need to appoint a guardian of property to manage the financial affairs of a child or grandchild, who is mentally incapable of doing so, is sometimes a necessity.
At the 2008 Canadian Association of Life Underwriters Annual Conference, the CRA confirmed that the transfer of a life insurance policy to a guardian for a minor child or grandchild or to a guardian for a child or grandchild with a mental incapacity would be eligible for the rollover noted above, as long as the relevant provincial legislation does not deem the guardian to be the owner of the policy. As long as provincial legislation provides that the guardian is only entitled to act on behalf of the minor or incapacitated person’s behalf (as opposed to owning property for them), it is the CRA’s view that the property still belongs to the minor or the mentally incapacitated person.
Parents of a mentally incapacitated person can therefore assist that person and his or her spouse or children without the insurance policy having to be owned by the parents or directly by the insured. You can now advise a client that a transfer of a life insurance policy to the guardian for an incapacitated child (for example, by will) will not be taxable.
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