Subsection 138.1(1) - Rules relating to segregated funds
Administrative Policy
8 November 2024 External T.I. 2024-1006321E5 - Foreign segregated funds and 138.1(1)
The preamble to s. 138.1(1), which defined a “segregated fund” as a specified group of properties in respect of which an insurer’s life insurance policy reserves varied depending on the specified group’s fair market value, was amended, effective for taxation years beginning after 2022, to add a further condition that, to be a segregated fund, the specified group of properties also must be specifically reported (as interpreted in s. 138(12.3)) to the relevant authority (i.e., OSFI or, failing a requirement to report to OSFI, then the Superintendent of Insurance or other similar authority of the insurer’ province of incorporation) as a segregated fund.
CRA confirmed that a life insurance policy, issued by a foreign insurer that does not operate in Canada and has no reporting obligation to a relevant authority with respect to such a policy, would not qualify as a segregated fund under s. 138.1(1) after giving effect to this amendment. In particular, an amount referred to in s. 138(12.3)(a) to (d) (including a nil amount under s. 138(12.3)(d)), in respect of a specified group of properties, must be reported to a relevant authority in order to meet the requirements in s. 138.1(1). Furthermore, “the Act does not provide for the grandfathering of foreign segregated funds that no longer meet the definition in the preamble of amended subsection 138.1(1) of the Act for taxation years that begin after 2022.”
6 December 2000 External T.I. 2000-0001345 F - POLICES FONDS DISTINCTS
CCRA did not wish to discuss the treatment of the exercise of a guarantee in excess of the premium paid by segregated fund members as this question was under review by Finance.
17 June 1999 External T.I. 9905255 - SEGREGATED FUNDS AND GUARANTEES
Includes a numerical example illustrating the income tax treatment of benefits provided to a policy holder in the form of guarantees under a segregated fund policy.
31 March 1995 External T.I. 9501955 - FOREIGN SEGREGATED FUND POLICIES
A life insurance policy of a non-Canadian insurance company not carrying on business that is held by a non-resident individual after she becomes resident will be a segregated fund policy if the criteria set out in the preamble of s. 138.1(1) are present.
Articles
Elie Roth, Tim Youdan, Chris Anderson, Kim Brown, "Classification of Trusts for Income Tax Purposes", Chapter 2 of Canadian Taxation of Trusts (Canadian Tax Foundation), 2016.
Overview
[U]nlike mutual funds, segregated funds cannot be structured as trusts because a life insurer is prohibited from acting as a trustee in respect of any services that it provides to the public….
Under the rules that apply to related segregated fund trusts, the income of the trust is deemed to be payable to the policyholder beneficiaries, and any capital gains or losses of the trust are deemed to be those of the beneficiaries. The income and gains are therefore taxed in the hands of the investors, even if the funds are not made payable. To avoid the potential for double taxation when the interest in the segregated fund is disposed of by the beneficiary, the adjusted cost base of the interest is increased by the amount of the income and capital gains that is deemed to be attributed to the policyholder. The amount of income attributable to a particular beneficiary is determined by reference to the terms and conditions of the segregated fund policy, and the CRA has stated that the Act does not require a particular allocation methodology. [fn 186:…2005-0156951E5]
Paragraph 138.1(1)(a)
Administrative Policy
2017 Ruling 2016-0625301R3 - Merger of two related segregated fund trusts
CRA ruled that the s. 107.4 rollover applied to the “transfer” of all the property of one segregated fund to another segregated fund held by the same insurer. The insurer was the legal and beneficial owner of both funds’ properties (in each case, consisting of units of a mutual fund trust) both before and after, so that the transfer consisted in the insurer starting to book the securities of the first fund as being securities of the second fund, and adjusting the notional units of the policyholders accordingly. Thus, such reallocations of the MFT units was sufficient to effect their transfer of property from one fund (which was deemed by s. 138.1 to be a trust) to the second such deemed trust.
| Locations of other summaries | Wordcount | |
|---|---|---|
| Tax Topics - Income Tax Act - Section 107.4 - Subsection 107.4(1) | merger of two segregated funds held by the same insurer would occur on a s. 107.4 rollover basis | 410 |
Paragraph 138.1(1)(e)
Subparagraph 138.1(1)(e)(i)
Administrative Policy
8 July 2020 CALU Roundtable Q. 4, 2020-0842171C6 - Segregated Funds and 85(1)
S. 39(1)(a)(iii) provides that a taxpayer’s capital gain excludes gain from the disposition of an insurance policy, including a life insurance policy, except for “that part of a life insurance policy in respect of which a policyholder is deemed by paragraph 138.1(1)(e) to have an interest in a related segregated fund trust”. CRA considered that on this basis “a disposition of an interest in a related segregated fund trust will generally result in capital gains treatment” so that “the interest may be considered a capital property, and accordingly, an eligible property under paragraph 85(1.1)(a) of the Act for purposes of subsection 85(1).” Accordingly, such an interest could be transferred on a s. 85(1) rollover basis. Before so concluding, CRA stated:
Under the current scheme of the Act, two distinct types of interests are contemplated for life insurance contracts that are segregated fund policies. First, there is the interest in a contract that is deemed under subparagraph 138.1(1)(e)(i) of the Act to be an interest in a related segregated fund trust (“the first interest”). Second, there is the remaining interest in the life insurance policy that is not deemed to be an interest in a related segregated fund trust (“the second interest”). The adjusted cost base of the first interest is determined by section 53 of the Act, while subsection 148(3) of the Act excludes amounts relevant to the first interest from the adjusted cost basis of the second interest.
| Locations of other summaries | Wordcount | |
|---|---|---|
| Tax Topics - Income Tax Act - Section 85 - Subsection 85(1.1) - Paragraph 85(1.1)(a) | an interest in a related segregated fund trust was a capital property | 230 |
Paragraph 138.1(1)(f)
Administrative Policy
7 October 2021 APFF Financial Strategies and Instruments Roundtable Q. 10, 2021-0896101C6 F - Death of seg. fund policyholder - income allocatio
An individual owns a segregated fund policy in a non-registered account with a life insurance company, and is the annuitant under the policy. The policy was acquired on January 3, and the individual died on December 1 of the same year, with the surviving spouse becoming the owner. For that year, the insurer allocated the income (interest, dividends, capital gains, etc.) from the segregated fund to the policyholders based on the number of days in that calendar year that each held notional units of the segregated fund.
Do the income allocations not yet received by the taxpayer on the date of death and appearing on the T3 slips (covering 11 months in this example) constitute "rights or things" of the deceased? If not, who should be taxed on such income?
CRA responded:
Generally … to be a right or thing … the individual would have to be legally entitled to receive the amount at the time of the individual’s death (the right would have to exist) and the value of that right would have to be determinable at that time. …
By virtue of paragraph 138.1(1)(f), the taxable income of the related segregated fund trust is deemed for the purposes of subsections 104(6), (13) and (24) to be an amount that has become payable in the year to the beneficiaries under the segregated fund trust and the amount therefor in respect of any particular beneficiary is equal to the amount determined by reference to the terms and conditions of the segregated fund policy. …
We understand that, regardless of the method of income allocation used by the insurer, no amount is actually paid or payable to a related segregated fund policyholder in respect of income allocations made by the insurer. Those allocations are relevant for tax purposes only, given the rule in paragraph 138.1(1)(f) and the application of subsections 104(6), 104(13) and 104(24). However, they do not create any right to receive an amount to the policyholders. The same applies to capital gains deemed to be the earnings of a related segregated fund policyholder by virtue of subsection 138.1(3).
Consequently, income and capital gains allocated to a related segregated fund policyholder in accordance with the terms of the policy … are not rights or things for the purposes of subsection 70(2) … .
| Locations of other summaries | Wordcount | |
|---|---|---|
| Tax Topics - Income Tax Act - Section 104 - Subsection 104(24) | deeming of an amount to be payable for s. 104(24) purposes does not create a legal entitlement to it | 214 |