CRA indicates that a parent paying premiums on a sub’s life insurance policies can engage s. 246(1), and that the premiums are non-deductible even if reimbursed on income account
Two brothers resident in Canada each has a Holdco owning 50% of Opco. In order to fund a buy-sell agreement on the death of an ultimate shareholder, each Holdco has purchased insurance on the life of its sole shareholder, with Opco as the revocable or irrevocable beneficiary of both insurance policies. Suppose further that Opco reimbursed the Holdcos for the premiums. Would the premiums be deductible to the Holdcos? CRA responded:
CRA indicated, consistently with 2010-0359421C6, that it generally considered that s. 246(1) could apply where a parent corporation owns and pays the premiums on a life insurance policy and its subsidiary is designated as the beneficiary so that, here, s. 246(1) could apply in respect of Opco, although the exception in s. 246(2) might apply if the two brothers dealt with each other at arm’s length.
However, CRA indicated that if Opco reimbursed the Holdcos for the premiums, it would become a question of fact as to whether s. 246(1) applies (even in the absence of the s. 246(2) exception) and that such reimbursements potentially could be included in their incomes pursuant to s. 9 or 12(1)(x) – but regardless of whether there was such an inclusion, the premiums would be non-deductible to the Holdcos because “premiums paid under a life insurance policy are not deductible in computing a taxpayer's business income because they are capital expenditures.” Presumably, if the Holdcos charged the premiums through to Opco at cost plus 1%, the premiums would be currently deductible, so that it seems odd that this result changes if there is no markup.
CRA did not discuss the s. 12(2.2) election.
Neal Armstrong. Summaries of 7 October 2022 APFF Financial Strategies and Instruments Roundtable, Q.2 under s. 246(1) and s. 9 - expense reimbursement.