Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.
Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the Department.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle du ministère.
Principal Issues: Does the deeming provision of subsection 110.6(15) apply to the shares of all shareholders?
Position TAKEN: Yes.
Reasons: The deeming provision applies in determining the fair market value of the assets of the corporation, and it does not change if you are determining the status of the shares of one shareholder versus the status of shares of another shareholder. It is a calculation done at the corporate level. See 9906865, 9310120, 1999-000648, 9310100.
CALU - Conference for Advanced Life Underwriting (2000)
Question 3
Valuation of Life Insurance
Assume that a corporation is the owner and beneficiary of individual life insurance policies on the lives of its shareholders (Mr. A and Mr. B). We wish to confirm the impact of the life insurance policies on the determination of qualified small business corporation (QSBC) shares under subsection 110.6(15) as it affects the shares owned by Mr. A and Mr. B. In this context, please confirm the following:
a) When determining the QSBC status for the shares owned by Mr. A (during the lifetime of Mr. A) the value of the life insurance policy under which Mr. A's life is insured would be deemed to be its cash surrender value pursuant to subparagraph 110.6(15)(a)(i). However, the life insurance policy under which Mr. B's life is insured would be valued at fair market value.
b) When determining the QSBC status for the shares owned by Mr. A in the event of his death, the fair market value of the life insurance policy under which Mr. A's life was insured would be deemed to be the cash surrender value pursuant to subparagraph 110.6(15)(a)(i). For the same purpose, the life insurance policy under which Mr. B's life is insured would be valued at fair market value.
c) When determining the QSBC status for the shares owned by Mr. B immediately after the death of Mr. A, the proceeds from the life insurance policy under which Mr. A's life was insured would be deemed to be the cash surrender value where the proceeds are used within 24 months to redeem, acquire, or cancel Mr. A's shares pursuant to subparagraph 110.6(15)(a)(ii). For the same purpose, the life insurance policy under which Mr. B's life is insured would be valued at cash surrender value.
d) Assume the death of Mr. A and the proceeds of the life insurance policy on Mr. A's life is used to repay a bank loan, for which the insurance policy was used as collateral security. When determining the QSBC status of the shares owned by Mr. B (immediately after the death of Mr. A) the proceeds from the life insurance policy under which Mr. A's life was insured would be valued at fair market value. For the same purpose, the life insurance policy under which Mr. B's life is insured would be valued at cash surrender value.
Agency's Response:
One of the criteria to be met in order for a share of a corporation to be a qualified small business corporation share is in paragraph (c) of the QSBCS definition in subsection 110.6(1). That paragraph requires a calculation of the fair market value of the assets of the corporation and a determination as to whether or not more than 50% of the fair market value of the assets are used principally in an active business carried on in Canada.
Now, subsection 110.6(15) provides that for the purposes of this test, and under specific circumstances, the fair market value of life insurance on a shareholder will be deemed to be its cash surrender value (within the meaning assigned by subsection 148(9)). In our opinion, and key to this question, this deeming provision applies in determining the fair market value of the assets of the corporation, and it does not change if you are determining the status of the shares of one shareholder versus the status of share of another shareholder. It is a calculation done at the corporate level.
Applying this view to your questions, and assuming the requirements of subsection 110.6(15) are met,
a) & b) When determining the QSBC status for the shares owned by Mr. A either during his lifetime for any purposes, or immediately before his death as a consequence of the deemed disposition rule of subsection 70(5), the fair market value of both life insurance policies would be the cash surrender value.
c) we agree with your comments.
d) We agree with your comments since the proceeds from the life insurance policy on Mr. A's life were not used for the purposes required by subsection 110.6(15).
Prepared by: Gwen Moore
Section 24
May 9, 2000
All rights reserved. Permission is granted to electronically copy and to print in hard copy for internal use only. No part of this information may be reproduced, modified, transmitted or redistributed in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, or stored in a retrieval system for any purpose other than noted above (including sales), without prior written permission of Canada Revenue Agency, Ottawa, Ontario K1A 0L5
© Her Majesty the Queen in Right of Canada, 2000
Tous droits réservés. Il est permis de copier sous forme électronique ou d'imprimer pour un usage interne seulement. Toutefois, il est interdit de reproduire, de modifier, de transmettre ou de redistributer de l'information, sous quelque forme ou par quelque moyen que ce soit, de facon électronique, méchanique, photocopies ou autre, ou par stockage dans des systèmes d'extraction ou pour tout usage autre que ceux susmentionnés (incluant pour fin commerciale), sans l'autorisation écrite préalable de l'Agence du revenu du Canada, Ottawa, Ontario K1A 0L5.
© Sa Majesté la Reine du Chef du Canada, 2000
Email this Content