21 June 2007 Roundtable, 2007-0229761C6 - Life insurance death benefits

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.

Principal Issues: Whether interest added to an indemnity for damages taxable

Position: No position

Reasons: question of fact

CLHIA ROUNDTABLE
2007 CONFERENCE

Question 4

Damages Payable Under Contested Contract

In a particular situation, an individual, resident of the province of Québec, acquired a life insurance policy under which his life was insured. A few months after the policy is issued, the individual dies. The insurer refuses to pay the death benefit, alleging fraudulent misrepresentation by the individual. This allegation, if proven, would allow the insurer to void the contract without a refund of premiums or a payment of the death benefit. The individual's estate successfully sues the insurer, which then pays the death benefit, interest and an additional amount under section 1619 of the Québec Civil Code (hereafter "QCC"), to the individual's estate. Section 1619 of the QCC states:

"An indemnity may be added to the amount of damages awarded for any reason, which is fixed by applying to the amount of the damages, from either of the dates used in computing the interest on them, a percentage equal to the excess of the rate of interest fixed for claims of the State under section 28 of the Act respecting the Ministère du revenu over the rate of interest agreed by the parties or, in the absence of agreement, over the legal rate."

Interpretation Bulletin IMP-87-1/R1, dated October 31, 2005, issued by the Ministère du revenue du Québec states that the indemnity under section 1619 of the QCC should not be taxable.

In technical interpretation 2005-0162821I7, CRA concluded that an additional amount paid to a corporate policyholder under section 1619 of the QCC, upon the death of an insured employee/shareholder, constitutes interest because it yields a return on money owed to the taxpayer. In this particular case, even if the additional amount was not specifically identified as interest it was, nevertheless, considered an amount received on account of, in lieu of, or in satisfaction of interest, which must be included in computing the corporate policyholder's income under paragraph 12(1)(c) of the ITA.

Question:

Would CRA confirm that the facts of the scenario described above can be distinguished from those in technical interpretation 2005-0162821I7, such that the additional amount received under section 1619 of the QCC would not be taxable under paragraph 12(1)(c) of the ITA?

Agency's Response

The question of whether or not an amount constitutes interest is a question of fact, which can only be determined after a review of all the facts surrounding a particular case.

We are of the view that such an examination can be done only in the context of an advance income tax ruling request submitted in the manner set out in Information Circular 70-6R5, Advance Income Tax Rulings, dated May 17, 2002, where all the relevant facts and documentation are submitted.

2007-022976
Adèle St-Amour
June 21, 2007