Part 3: Reporting Segregated Funds with Guarantees at Death

Reporting for taxpayers with segregated funds that feature guarantees at death require some advanced knowledge to this properly.  

The policyholder is deemed to have disposed of the contract at its FMV at death. If the value of the assets in the fund increases, the gain will be a capital gain to the policyholder when the policy matures or to his estate if the policy owner dies. The example below demonstrates how to report this on Schedule 3:

Example: Mark had purchased 1,000 units in ABC segregated fund for $8,450 which, through income allocations had increased to 1,247 units at the time of his death during the tax year. The ACB of the units was $10,600 at the time of his death. At that time the value of the fund units was $9.05 per unit. On Mark’s final return, a capital gain of $685.35 must be reported in Part 3 of Schedule 3:

Proceeds of disposition:    $9.05/unit x 1,247 units = $11,285.35

Adjusted cost base:           $10,600

Outlays and expenses:      $0.00

Capital gain:                      $11,285.35 – $10,600 – $0.00 = $685.35.

If the value of the assets in the fund decreases, the taxpayer is deemed to have acquired additional notional units in the fund, so no gain is incurred even though the taxpayer receives more than the value of the notional units. A capital loss may occur if the guaranteed value is less than 100% of the investment. Report as follows:

Example: When Ester died, she owned 1,500 units in DEF segregated fund. The ACB of her units was $7.49 per unit. She had a guarantee at death of $10 per unit but the unit value at that time was $9.00 per unit.

Ester’s estate will receive $15,000 (1,500 units x $10.00 per unit guaranteed value). Technically this is accomplished by allocating more units to Ester at $9 per unit to ensure the $15,000 guarantee is met. However, on Schedule 3 of Ester’s final return the gain is calculated in the normal manner:

Proceeds of disposition:     $15,000

Adjusted cost base:             1,500 units x $7.49/unit = $11,235

Capital gain:                        $15,000 – $11,235 = $3,765

Excerpted from Jacks on Tax by Evelyn Jacks. The 2014 edition will be available in December and is now available for pre-orders in our online bookstore.