By: Florence Marino B.A., LL.B., TEP | Vice President, Tax & Estate Planning
Subsection 148(8) of the Income Tax Act allows a tax-free rollover of a life insurance policy where it has been transferred to the policyholder’s child for no consideration and a child of the policyholder or a child of the transferee is the life insured under the policy. Recently, at the 2024 CALU CRA Roundtable in May, the CRA answered yet another question about the scope of this provision. So, we thought it might be a good time to provide a handy summary of all the ins and outs of this provision (with references of course!).
Requirements of the transfer – A and THE
The transfer must be made to A child of the policyholder. And A child of the policyholder or A child of the transferee must be THE life insured. What this means is:
The transferee does not have to be the same person as the life insured – for example, a policy can be transferred to Daughter and Son can be the life insured under the policy (2018-0745831C6).
The transfer must be made directly from the policyholder to a child. In general, what this means is that the policy must be transferred during the life of the policyholder. However, on death if a successor-owner designation (see subsection 199(1) Insurance Act, Ontario) has been made, the transfer would be made by virtue of the policy contract and would not pass through the estate of the deceased policyholder (see: 9433865, 9618075). This type of transfer would be direct from the policyholder and therefore, qualify. Transfer of a policy to a trustee for the sole benefit of a child would not qualify (9826715). A transfer of a policy to a guardian of a child’s property would qualify (2008-0270431C6).
The word THE means that there can be only one life insured under the policy at the time of the transfer (even if all the life insureds are children – see: 2004-0065441C6). However, there need not only be one life insured from inception of the policy. For example, there could be a joint-last-to-die policy insuring Dad and Son and under the contract, Dad as policyholder makes a successor-owner designation that allows the policy to transfer to the Son directly under the contract on the death of Dad. Since Son is the only life insured at the time of the transfer, this qualifies (see 2005-0116681C6).
Who is a child?
The definition of “child” for these purposes is VERY broad. The term “child” is defined in subsection 148(9) as having the meaning in subsection 70(10) of the Act. And since the definition in 70(10) includes but is not limited to the list provided in it, the extended definition of “child” for purposes of the whole Act in subsection 252(1) also applies. This adds up to a very long list including but not limited to:
- grandchildren
- great-grandchildren
- children in-law (even where the spouse of that child in-law is deceased (see: this year’s CALU question on this subject alluded to above, 2024-1007101C6 – Q3 2024 CALU CRA Roundtable) but not if their relationship ceased for reasons other than death!)
- children of a spouse or common-law partner (stepchildren)
- a person who at any time before age 19 was wholly dependent on the taxpayer (i.e. policyholder) and was under their custody and control (but not necessarily at the time of the transfer.)
Intergenerational transfers
Due to this broad definition of child, there is a very wide scope for intergenerational or what is sometimes referred to as cascading life insurance transfers. A common example is where Grandma wants to make sure her grandchildren have a fundamental base of life insurance protection. She owns and funds life insurance policies on each of her grandchildren (Daughter’s children). She makes a successor owner designation in favour of Daughter so that the policy could pass to Daughter on her death or Grandma transfers each policy to Daughter during her lifetime. Daughter would be able to transfer each of the policies to her children at an appropriate point. All of these transfers would qualify for the rollover under 148(8).
Also, other rollover provisions can be used together with the child rollover provision. For example, Grandma could transfer to Grandpa during her life (under subsection 148(8.1)) or on her death (under 148(8.2)) and Grandpa could carry out a later transfer to Daughter or directly to a grandchild at an appropriate point.
Planning points
A transfer for no consideration is a “disposition”. Where there is no rollover there could be tax consequences of making a transfer if the policy’s cash surrender value exceeds its adjusted cost basis. The difference is ordinary income taxed like interest income.
Transfers to minors are a problem as they lack capacity to deal with the policy. Section 202 of the Insurance Act (Ontario) provides that a minor at the age of 16 has the capacity of an 18-year-old in respect of a life insurance contract. And if the 16-year-old disposes of the policy and there is a taxable policy gain, attribution of income to the transferor could result.
Capacity can also be an issue for grandparents in some of the above scenarios. If a policyholder is not capable of making a transfer, or if the person to whom a transfer is made is incapable, that could result in a planned cascading not being able to be carried out or an inability to deal with the policy in the normal course.
Unlike spousal or common-law partner rollover provisions (for life insurance, these are at sections 148(8.1) and (8.2) of the Act), there is no requirement that the policyholder or the transferee child be resident in Canada at the time of the transfer. The non-resident transferee would have to assess if there are any issues in their jurisdiction relating to holding a Canadian life insurance policy and would need to be mindful that there could be tax consequences on disposition of the policy (such as withholding taxes in Canada).
FOOTNOTE:
This publication is protected by copyright. Tompkins Insurance is not engaged in rendering tax or legal advice. TOMPKINSights contains a general discussion of certain tax and legal developments and should not be construed as tax or legal advice.
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florence@tompkinsinsurance.com
