15 December 1998 External T.I. E9824645 - CAPITAL DIVIDEND ACCOUNT

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.

XXXXXXXXXX 							982464

Attention: XXXXXXXXXX

December 15, 1998

Dear Sirs:

This is in reply to your letter dated September 17, 1998 wherein you requested our views as to whether subsection 15(1) of the Income Tax Act ("Act") would have application in the following hypothetical situation. Parentco would be the beneficiary of a life insurance policy on the life of its controlling shareholder. Subco, a wholly-owned subsidiary of Parentco, would be the owner of the life insurance policy and the person paying the premiums.

Although you did not so indicate in your letter we assume the reason for the structure outlined above and the reason for your concern that subsection 15(1) of the Act could apply to Parentco is the intention to have the full amount of the life insurance proceeds included in the capital dividend account ("CDA") of Parentco pursuant to paragraph 89(1)(d) of the Act without reduction for the premiums paid by Subco in respect of the policy.

While a review of the specific facts of a particular situation would be required it is our view that generally subsection 15(1) of the Act would not apply to include a benefit in a beneficiary's income as a consequence of the policyholder paying the premiums due under the policy or upon receipt by the beneficiary of the proceeds of the life insurance policy as a consequence of the death of the life insured.

However it is clearly the intent of paragraph 89(1)(d) of the Act that the amount of the proceeds of a life insurance policy to be included in the CDA be reduced by the adjusted cost basis, within the meaning assigned by subsection 148(9) of the Act, of the policy. Accordingly, unless there are bona fide reasons, other than to obtain a tax benefit,for the structure described above, it is our opinion that there may be a reasonable argument for applying subsection 245(2) of the Act to reduce the amount of the life insurance proceeds to be included by Parentco in its CDA by the adjusted cost basis of the policy.

While we hope that the foregoing comments are useful they are given in accordance with the practice referred to in paragraph 22 of Information Circular 70-6R3 dated December 30, 1996 and are not binding on the Department in respect of any particular situation.

Yours truly,

F. Lee Workman
Manager
Financial Institutions Section
Income Tax Rulings and
Interpretations Directorate