Income Tax Act — I-3.3 138.1
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 und