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: (1) Whether the CDA balance of Amalco will include proceed from an insurance policy payable to a predecessor corporation? At the time of the disposition of the shares of the predecessor corporation the vendor believed that such policy had been cancelled. (2) Whether the purpose test found in subsection 83(2.1) is met?
Position: (1) Yes. (2) No.
Reasons: Wording of the Act.
XXXXXXXXXX 2015-062461
XXXXXXXXXX, 2016
Dear XXXXXXXXXX,
Re: Advance Income Tax Ruling
XXXXXXXXXX
XXXXXXXXXX
This is in reply to your letters of XXXXXXXXXX, and XXXXXXXXXX in which you requested an advance income tax ruling on behalf of the above-named taxpayers.
We understand that, to the best of your knowledge and that of the taxpayers on whose behalf this ruling was requested, none of the issues described herein:
(a) is in an earlier return of the taxpayer or a related person,
(b) is being considered by a tax services office or taxation centre in connection with a previously filed tax return of the taxpayer or a related person,
(c) is under objection by the taxpayer or a related person,
(d) is before the courts or, if a judgment has been issued, the time limit for appeal to a higher court has expired, or
(e) is the subject of a ruling previously considered by the Directorate involving the taxpayer or a related person.
Unless otherwise noted, all references herein to sections or components thereof are references to the Income Tax Act, R.S.C. 1985, c.1 (5th Supp.), as amended (hereinafter the “Act”) and, unless otherwise indicated, all monetary amounts are expressed in Canadian dollars.
DESIGNATION OF PARTIES
Throughout this letter, except in Paragraph 22, the corporate and individual taxpayers mentioned in this letter will be referred to as follows:
“Amalco” means the corporation created on the Amalgamation which was named XXXXXXXXXX;
“B” means XXXXXXXXXX who, prior to his death, was an individual resident of Canada;
“Canco 1” means XXXXXXXXXX which was a corporation incorporated under the XXXXXXXXXX on XXXXXXXXXX;
“Canco 2” means XXXXXXXXXX which was a corporation incorporated under the XXXXXXXXXX on XXXXXXXXXX;
“Class J Shareholder” means XXXXXXXXXX who is an individual resident in Canada and the only shareholder of the Class J shares of the capital stock of Amalco;
“Escrow Agent” means XXXXXXXXXX;
“Estate” means the estate of B whose sole executrix and beneficiary is M;
“Insurer” means XXXXXXXXXX, insurer under the Policy;
“M” means XXXXXXXXXX who is an individual resident in Canada and is the surviving spouse of B.
DEFINITIONS
Unless otherwise noted, the following terms have the meaning ascribed to them below:
(a) “ACB” means adjusted cost basis of the Policy, as defined in subsection 148(9);
(b) “Amalgamation” means the amalgamation of Canco 1 and Canco 2 on the Amalgamation Date;
(c) “Amalgamation Date” means the date stated in Amalco’s certificate of amalgamation;
(d) “Business Number” means the business number assigned by the CRA to each corporation for tax compliance purposes;
(e) “CCPC” means Canadian-controlled private corporation as defined in subsection 125(7);
(f) “Capital dividend” means the dividend declared by Amalco to its Class J shareholder as described in paragraph 19 below;
(g) “CDA” means capital dividend account as defined in subsection 89(1);
(h) “CRA” means the Canada Revenue Agency;
(i) “Policy” means the $XXXXXXXXXX life insurance policy on the life of B issued by Insurer, under Policy Number XXXXXXXXXX;
(j) “Proposed Transactions” means the transactions described in paragraphs 19 and 20 below.
FACTS
1. B died on XXXXXXXXXX, testate.
2. M was the sole executrix and beneficiary of the Estate.
3. Before the time of his death B carried on the XXXXXXXXXX through his professional corporation, Canco 1.
4. Canco 1 was the owner and beneficiary of the Policy. The Policy had been issued to B on XXXXXXXXXX and was transferred by B to Canco 1 on XXXXXXXXXX and Canco 1 was named as beneficiary of the Policy at that time.
5. The Policy was taken out by B for estate planning purposes XXXXXXXXXX.
6. Prior to his death B, had indicated his intention to cancel the Policy which he never followed through with before his death.
7. Subsequent to B’s death, B’s insurance agent was erroneously informed by Insurer that the Policy had been cancelled.
8. On XXXXXXXXXX, all of the shares of the capital stock of Canco 1 were acquired by Canco 2 from the Estate and M in an arm’s length transaction. The CDA balance of Canco 1 was nil at that time.
9. All of the shareholders of Canco 2, including the Class J Shareholder, are individuals who are residents of Canada.
10. During the negotiations of the purchase and sale of the shares of Canco 1, M believed that the Policy had been cancelled and was not in effect upon the death of B.
11. The valuation of the shares of Canco 1, which was the basis of the Canco 2’s purchase price for the Canco 1 shares, did not include any amount from a life insurance policy as neither the valuator nor Canco 2 were aware that the Policy was still in effect.
12. The date of the Amalgamation was XXXXXXXXXX.
13. After the closing of the sale and purchase of the shares of the capital stock of Canco 1 and the subsequent Amalgamation, Insurer informed M of its error and that the Policy was still in effect.
14. On XXXXXXXXXX, Insurer issued a cheque in the amount of $XXXXXXXXXX made payable to Canco 1 as beneficiary of the Policy and in payment of the Policy.
15. The cheque represented $XXXXXXXXXX in respect of the proceeds of the Policy plus $XXXXXXXXXX which was reported as interest from Canadian sources on a T5 Supplementary issued by Insurer to Canco 1.
16. The cheque for the insurance proceeds was deposited by M into a bank account in the name of Canco 1. Pursuant to the sale agreement, M was entitled to the cash on hand of Canco 1 on closing. Funds representing the insurance proceeds plus interest are presently held in escrow in the trust account of the Escrow Agent pending resolution of these matters.
17. Insurer has advised that the ACB of the Policy is $XXXXXXXXXX.
18. The shareholders of Amalco have been advised of the Policy and have agreed to cooperate with respect to facilitating the payment of the $XXXXXXXXXX life insurance proceeds to M by implementing the Proposed Transactions described below. The CDA balance of Amalco is currently $XXXXXXXXXX.
PROPOSED TRANSACTIONS
19. Amalco will declare a $XXXXXXXXXX dividend out of its CDA (amount that will represent its CDA balance immediately prior to such payment) equal to the amount of the insurance proceeds received from the Policy payable to the Class J Shareholder of record of Amalco. The directors of Amalco will make the election provided for in subsection 83(2) for the full amount of this dividend to be paid out of the CDA of Amalco.
20. The Class J Shareholder will transfer to M the amount of the capital dividend proceeds, net of the costs incurred by Amalco to implement the proposed transactions.
21. Canco 2 did not have any knowledge of such corporate life insurance being in effect for the benefit of Canco 1 at the time of acquiring the shares of Canco 1 and as a result “one of the main purposes” of acquiring the shares of Canco 1 would not have been to receive a capital dividend.
22. The federal Business Numbers of the parties referred to herein, the locations of the tax services office and taxation centre where its returns are filed are as follows:
XXXXXXXXXX
Business Number: XXXXXXXXXX
Tax Services Office: XXXXXXXXXX
Taxation Centre: XXXXXXXXXX
Address: XXXXXXXXXX
XXXXXXXXXX
Social Insurance Number: XXXXXXXXXX
Tax Services Office: XXXXXXXXXX
Taxation Centre: XXXXXXXXXX
Address: XXXXXXXXXX
PURPOSE OF THE PROPOSED TRANSACTIONS
The purpose of the proposed transactions is to return the proceeds of the Policy to M on a tax-free basis as would have occurred if Insurer had informed M that the policy was in existence before the sale of the shares of the capital stock of Canco 1. Had such notice been given by Insurer, the capital dividend in respect of the insurance proceeds would have been declared and paid by Canco 1 to M as a capital dividend prior to the sale of the shares of the capital stock of Canco 1.
RULINGS
Provided that the preceding statements constitute a complete and accurate disclosure of all relevant facts, proposed transactions, additional information and the purpose of the proposed transactions, and provided that the proposed transactions are completed in the manner described above, we confirm the following:
A. Pursuant to subparagraph (d)(ii) of the definition of “capital dividend account” in subsection 89(1), the proceeds received from the Policy by Amalco as a consequence of the death of B, that exceed the ACB of the Policy to the predecessor corporation Canco 1 immediately before B’s death, will be included in Amalco’s CDA.
B. Provided that Amalco elects pursuant to subsection 83(2) in respect of the full amount of the dividend described in paragraph 19 above, such dividend will be deemed to be a capital dividend. Subsection 83(2.1) will not apply with respect to such dividend.
C. The provisions of subsection 245(2) will not be applicable as a result of the proposed transactions, in and by themselves, to re-determine the tax consequences stated in the rulings given above.
The above rulings are given subject to the limitations and qualifications set forth in Information Circular 70-6R7 issued on April 22, 2016, and are binding on the CRA provided that the Proposed Transactions are completed before XXXXXXXXXX.
The above rulings are based on the Act in its present form and do not take into account any proposed amendments to the Act which if enacted, could have an effect on the rulings provided herein.
Unless otherwise expressly confirmed, nothing in this letter should be construed as implying that the CRA has confirmed, reviewed or made any determination in respect of any other tax consequence relating to the facts, proposed transactions or any transaction or event taking place either prior to the proposed transactions or subsequent to the proposed transactions, whether described in this letter or not, other than those specifically described in the rulings given above.
An invoice for our fees in connection with this ruling request will be forwarded to you under separate cover.
Yours truly,
XXXXXXXXXX
For Director
Reorganizations Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch
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