Income Tax Act (R.S.C., 1985, c. 1 (5th Supp.))

Marginal note:Rules relating to segregated funds

• 138.1 (1) In respect of life insurance policies for which all or any part of an insurer’s reserves vary in amount depending on the fair market value of a specified group of properties that is reported to a relevant authority (as defined in subsection 138(12)) as a segregated fund (in this section referred to as a “segregated fund”), for the purposes of this Part, the following rules apply:

  • (a) a trust (in this section and section 138.2 referred to as the “related segregated fund trust”) is deemed to be created at the time that is the later of

    • (i) the day that the segregated fund is created, and

    • (ii) the day on which the insurer’s 1978 taxation year commences,

    and to continue in existence throughout the period during which the fund determines any portion of the benefits under those policies that vary in amount depending on the fair market value of the property in the segregated fund (in this section referred to as “segregated fund policies”);

  • (b) property that has been allocated to and that remains a part of the segregated fund, and any income that has accrued on that property is deemed to be the property and income of the related segregated fund trust and not to be the property and income of the insurer;

  • (c) the insurer is deemed to be

    • (i) the trustee who has ownership or control of the related segregated fund trust property,

    • (ii) a resident of Canada in respect of the related segregated fund trust property used or held by it in the course of carrying on the insurer’s life insurance business in Canada, and

    • (iii) a non-resident of Canada in respect of the related segregated fund trust property not used or held by it in the course of carrying on the insurer’s life insurance business in Canada;

  • (d) where at a particular time there is property in the segregated fund that was not funded with premiums paid under a segregated fund policy,

    • (i) the insurer is deemed to have an interest in the related segregated fund trust that is not in respect of any particular property or source of income, and

    • (ii) the cost at any time of that interest to the insurer is deemed to be the total of

      • (A) for property of the trust at that time allocated by the insurer to the segregated fund prior to 1978, the amount that would be its adjusted cost base to the insurer if the interest had been a capital property at all relevant times prior to 1978 and if the rules in this section had been applicable for the taxation years after 1971 and before 1978, and

      • (B) for property of the trust at that time allocated by the insurer to the segregated fund after 1977, the fair market value of the property at the time it was last allocated to the segregated fund by the insurer;

  • (e) where at any particular time there is property in the segregated fund that was funded with a portion of the premiums paid before that time under a segregated fund policy,

    • (i) the respective segregated fund policyholder is deemed to have an interest in the related segregated fund trust that is not in respect of any particular property or source of income,

    • (ii) the cost of that interest is deemed to be the amount that is the total of

      • (A) the amount that would be its adjusted cost base to the insurer at December 31, 1977 if the interest had been a capital property at all relevant times prior to 1978 and if the rules in this section (if subsection 138.1(3) were read without reference to the expressions “or capital loss” and “or loss”) had been applicable for taxation years after 1971 and before 1978, and

      • (B) the total of amounts each of which is that portion of a premium paid before that time and after the day referred to in subparagraph 138.1(1)(a)(ii) under a segregated fund policy that was or is to be used by the insurer to fund property allocated to the segregated fund (other than the portion of the premium that is an acquisition fee), and

    • (iii) the portion of a premium included in a segregated fund is deemed not to be an amount paid in respect of a premium under the policy;

  • (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;

  • (g) where at a particular time the fair market value of property transferred by the insurer to the segregated fund results in an increase at that time in the portion of the insurer’s reserves for a segregated fund policy held by a policyholder that vary with the fair market value of the segregated fund and a decrease in the portion of its reserves for the policy that do not so vary, the amount of that increase shall,

    • (i) for the purpose of the determination of H in the definition adjusted cost basis in subsection 148(9), be deemed to be proceeds of disposition that the policyholder became entitled to receive at that time,

    • (ii) for the purpose of computing the adjusted cost base to the policyholder of the policyholder’s interest in the related segregated fund trust, be added at that time to the cost to the policyholder of that interest, and

    • (iii) for the purpose of computing the insurer’s income, be deemed to be a payment under the terms and conditions of the policy at that time;

  • (h) where at a particular time the fair market value of property transferred by the insurer from the segregated fund results in an increase at that time in the portion of the insurer’s reserves for a segregated fund policy that do not vary with the fair market value of the segregated fund and a decrease in the portion of its reserves for the policy that so vary, the amount of that increase shall, for the purpose of calculating the insurer’s income, be deemed to be a premium received by the insurer at that time;

  • (i) where at a particular time the policyholder of a segregated fund policy disposes of all or a portion of the policyholder’s interest in the related segregated fund trust, that proportion of the amount, if any, by which the acquisition fee with respect to the particular policy exceeds the total of amounts each of which is an amount determined under this paragraph with respect to the particular policy before that time, that

    • (i) the fair market value of the interest disposed of at that time

    is of

    • (ii) the fair market value of the policyholder’s interest in the particular segregated fund trust immediately before that time,

    is deemed to be a capital loss of the related segregated fund trust that reduces the policyholder’s benefits under the particular policy by that amount for the purposes of subsection 138.1(3);

  • (j) the obligations of an insurer in respect of a benefit that is payable under a segregated fund policy, the amount of which benefit varies with the fair market value of the segregated fund at the time the benefit becomes payable, are deemed to be obligations of the trustee under the related segregated fund trust and not of the insurer and any amount received by the policyholder or that the policyholder became entitled to receive at any particular time in a year in respect of those obligations is deemed to be proceeds from the disposition of an interest in the related segregated fund trust;

  • (k) a reference to “the terms and conditions of the trust arrangement” in section 104 or subsection 127.2(3) is deemed to include a reference to the terms and conditions of the related segregated fund policy and the trustee is deemed to have designated the amounts referred to in that section in accordance with those terms and conditions; and

  • (l) where at any time an insurer acquires a share as a first registered holder thereof and allocates the share to a related segregated fund trust, the trust shall be deemed to have acquired the share at that time as the first registered holder thereof for the purpose of computing its share-purchase tax credit and the insurer shall be deemed not to have acquired the share for the purpose of computing its share-purchase tax credit.

• Marginal note:Rules relating to property in segregated funds at end of 1977 taxation year

  (2) Where an insurer holds property at the end of its 1977 taxation year in connection with a segregated fund, the following rules apply:

  • (a) the property is deemed to have been acquired by the related segregated fund trust on the day determined under paragraph 138.1(1)(a) at a cost equal to the adjusted cost base of the property to the insurer on that day and that transaction is deemed to be a transaction between persons not dealing at arm’s length;

  • (b) the property is deemed to have been disposed of by the insurer on the day referred to in paragraph 138.1(2)(a) for proceeds equal to the adjusted cost base of the property to the insurer on that day; and

  • (c) for the purpose of computing the insurer’s income for its 1978 taxation year it shall be deemed to have made a payment to its policyholders in satisfaction of their rights under their segregated fund policies in that year equal to that portion of the amount deducted under subparagraph 138(3)(a)(i) in computing its income for its 1977 taxation year that is in respect of segregated fund policies.

• Marginal note:Transition — pre-2018 non-capital losses

  (2.1) For the purpose of determining the taxable income of a related segregated fund trust for a taxation year that begins after 2017, the non-capital losses of the related segregated fund trust that arise in a taxation year that begins before 2018 are deemed to be nil.

• Marginal note:Capital gains and capital losses of related segregated fund trusts

  (3) A capital gain or capital loss of a related segregated fund trust from the disposition of any property shall, to the extent that a policyholder’s benefits under a policy or the interest in the trust of any other beneficiary is affected by that gain or loss, be deemed to be a capital gain or capital loss, as the case may be, of the policyholder or other beneficiary and not that of the trust.

• (3.1) and (3.2) [Repealed, 2013, c. 34, s. 287]

• Marginal note:Election and allocation

  (4) Where at any particular time after 1977, a policyholder withdraws all or part of the policyholder’s interest in a segregated fund policy, the trustee of a related segregated fund trust may elect in prescribed manner and prescribed form to treat any capital property of the trust as having been disposed of, whereupon the property shall be deemed to have been disposed of on any day designated by the trustee for proceeds of disposition equal to

  • (a) the fair market value of the property on that day,

  • (b) the adjusted cost base to the trust of the property on that day, or

  • (c) an amount that is neither greater than the greater of nor less than the lesser of the amounts determined under paragraphs 138.1(4)(a) and 138.1(4)(b),

  whichever is designated by the trustee, and to have been reacquired by the trust immediately thereafter at a cost equal to those proceeds, and where the trustee of a related segregated fund trust has made such an election, the following rules apply:

  • (d) the amount of any capital gain or capital loss resulting from the deemed disposition shall be allocated by the trustee to any policyholder withdrawing all or part of the policyholder’s interest in the policyholder’s policy at that time to the extent that the amount of the policyholder’s benefits under the policy at that time is affected by the capital gain or capital loss in respect of property held by the related segregated fund trust at that time,

  • (e) the allocation referred to in paragraph 138.1(4)(d) is deemed to have been made immediately before the withdrawal,

  • (f) any capital gain not so allocated is deemed to be allocated in accordance with the terms and conditions of the policy, and

  • (g) any capital loss not so allocated is deemed to be a superficial loss of each policyholder to the extent that the policyholder’s benefits under the policy would be affected by the loss.

• Marginal note:Adjusted cost base of property in related segregated fund trust

  (5) At any particular time, the adjusted cost base of each capital property of a related segregated fund trust shall be deemed to be the amount, if any, by which

  • (a) the adjusted cost base of the property to the trust immediately before that time

  exceeds

  • (b) the total of amounts each of which is an amount in respect of the disposition by a policyholder of all or part of the policyholder’s interest in the related segregated fund trust at that time equal to that proportion of the amount, if any, by which

    • (i) the adjusted cost base to the policyholder of that interest at that time

    exceeds

    • (ii) the policyholder’s proceeds of the disposition of that interest in the trust

    that

    • (iii) the fair market value of the capital property at that time

    is of

    • (iv) the total of amounts each of which is the fair market value of a capital property of the related segregated fund trust at that time.

• Definition of acquisition fee

  (6) In this section, acquisition fee means the amount, if any, by which the total of amounts each of which is

  • (a) that portion of a premium charged by the insurer under a segregated fund policy that is not included in the related segregated fund or cannot reasonably be regarded as an amount required to fund a mortality or maturity benefit,

  • (b) a transfer from the segregated fund that cannot reasonably be regarded as an amount required to fund a mortality or maturity benefit other than an annual administration fee or charge, or

  • (c) any amount by which the proceeds payable to the policyholder under a particular segregated fund policy is reduced on the surrender or partial surrender of the policy that may reasonably be regarded as a surrender fee,

  exceeds

  • (d) the total of amounts each of which is that portion of an amount described in paragraph 138.1(6)(a), 138.1(6)(b) or 138.1(6)(c) that may reasonably be considered to be in respect of an interest in the segregated fund that was disposed of before 1978.

• Marginal note:Non-application of subsections (1) to (6)

  (7) Subsections (1) to (6) do not apply to the holder of a segregated fund policy with respect to such a policy that is issued or effected as or under a FHSA, pooled registered pension plan, registered pension plan, registered retirement income fund, registered retirement savings plan or TFSA.

Marginal note:Qualifying transfer of funds

• 138.2 (1) For the purposes of this section, a qualifying transfer occurs at a particular time (in this section referred to as the “transfer time”) if

  • (a) all of the property that, immediately before the transfer time, was property of a related segregated fund trust has become, at the transfer time, the property of another related segregated fund trust (in this section referred to as the “transferor” and “transferee”, respectively, and collectively as the “funds”);

  • (b) every person that had an interest in the transferor immediately before the transfer time (in this section referred to as a “beneficiary”) has ceased to be a beneficiary of the transferor at the transfer time and has received no consideration for the interest other than an interest in the transferee;

  • (c) the trustee of the funds is a resident of Canada; and

  • (d) the trustee of the funds so elects, by filing a prescribed form with the Minister on or before the election’s due date.

• Marginal note:General

  (2) If there has been a qualifying transfer,

  • (a) the last taxation years of the funds that began before the transfer time are deemed to have ended at the transfer time and the next taxation year of the transferee is deemed to have begun immediately after the transfer time;

  • (b) no amount in respect of a non-capital loss, net capital loss, restricted farm loss, farm loss or limited partnership loss of a fund for a taxation year that began before the transfer time is deductible in computing the taxable income of the funds for a taxation year that begins after the transfer time;

  • (c) each beneficiary’s interest in the transferor is deemed to have been disposed of at the transfer time for proceeds of disposition, and each beneficiary’s interest in the transferee received in the qualifying transfer is deemed to have been acquired at a cost, equal to the cost amount to the beneficiary of the interest in the transferor immediately before the transfer time;

  • (d) any amount determined under subsection 138.1(6) in respect of a policyholder’s interest in the transferor is deemed

    • (i) to have been charged, transferred or paid in respect of the policyholder’s interest in the transferee that is acquired on the qualifying transfer, and

    • (ii) to not have been charged, transferred or paid in respect of the policyholder’s interest in the transferor; and

  • (e) subsections 138.1(4) and (5) do not apply in respect of any disposition of an interest in the transferor arising on the qualifying transfer.

• Marginal note:Transferor – capital gains and losses

  (3) In respect of a qualifying transfer, each property of the transferor held immediately before the transfer time is deemed to have been disposed of by the transferor immediately before the transfer time for proceeds of disposition, and to have been acquired by the transferee at the transfer time for a cost, equal to the lesser of

  • (a) the fair market value of the property immediately before the transfer time, and

  • (b) the greater of

    • (i) the cost amount of the property to the transferor immediately before the transfer time, and

    • (ii) the amount that is designated in respect of the property in the election in respect of the qualifying transfer.

• Marginal note:Transferee – capital gains and losses

  (4) In respect of a qualifying transfer, each property of the transferee held immediately before the transfer time is deemed to have been disposed of by the transferee immediately before the transfer time for proceeds of disposition, and to have been reacquired by the transferee at the transfer time for a cost, equal to the lesser of

  • (a) the fair market value of the property immediately before the transfer time, and

  • (b) the greater of

    • (i) the cost amount of the property to the transferee immediately before the transfer time, and

    • (ii) the amount that is designated in respect of the property in the election in respect of the qualifying transfer.

• Marginal note:Loss limitation

  (5) Subsection 138.1(3) does not apply to capital losses of a fund from the disposition of property on a qualifying transfer under subsection (3) or (4) to the extent that the amount of such capital losses exceeds the amount of capital gains of the fund from the disposition of property on the qualifying transfer under subsection (3) or (4), as the case may be.

• Marginal note:Due date

  (6) The due date of an election referred to in paragraph (1)(d) is the later of

  • (a) the day that is six months after the day that includes the transfer time, and

  • (b) a day that the Minister may specify.