HFI Financial

SEGREGATED FUND POLICIES AT DEATH

A recent publication noted that tile owner of a non registered segregated fund contract could not "roll" mutual that contract to a surviving spouse. Rather, the deceased owner would realize a deemed disposition of' the segregated fund interest and incur the resulting income tax liability. This result is vastly different than the result for the owner of that cousin of segregated funds. mutual funds. While the published statement is true, the following comments should help clarify the situation.

It is important to note that a segregated fund contract is very different from a mutual fund contract. A segregated fund contract, as a life insurance policy, has an owner, a beneficiary and an annuitant. The annuitant is the measuring life against which matters such as the maturity of the contract are determined.

Upon the death of the annuitant, the contract matures Pursuant to its terms. Generally, the contract is terminated, the interest in the segregated fund is extinguished, and the value is paid out as a death benefit in cash to the beneficiary.

Upon the death of the owner or of the annuitant, the owner is deemed for tax purposes to have disposed of the contract. The deemed proceeds of disposition is equal to the value of the contract immediately before death, and the owner will be taxed on any gain (other than the  mortality gain under an insured contract) deemed to have been realized at that time.

If the owner is not the annuitant, and the owner dies, the contract is not terminated. The transfer of' ownership at death is treated like any other disposition of capital property. The owner will be taxed as noted in the previous paragraph. However, where the transfer is to a surviving spouse, there is a rollover, i.e., tax deferral because the deemed proceeds of disposition will he equal to the deceased's adjusted cost base in the contract. 

While the income tax results for a segregated fund contract are different from those of a mutual fund investment (which has no annuitant and therefore does not mature at the time of the annuitant's death). There may be an opportunity for planning since the segregated fund contract matures upon the death Of the annuitant, consideration might he given to:

• the initial choice of annuitant

• changing the annuitant during the term of the segregated fund contract (if the contract so allows)

• using joint annuitants