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: Whether paragraph 110.6(15)(a) of the Act applies to a joint (last to die) or multi life insurance policy.
Position: Yes.
Reasons: Even if there is more than one person's life insured under a life insurance policy owned by a particular corporation, the requirement in paragraph 110.6(15)(a) of the Act that "a person whose life was insured under an insurance policy owned by a particular corporation, owned shares of the capital stock of the particular corporation..." would still be met by each person whose life was insured under that policy and who owned shares of the corporation.
See Note to File regarding clause 110.6(15)(a)(ii)(B) of the Act.
XXXXXXXXXX 1999-000648
G. Moore
January 25, 2000
Dear XXXXXXXXXX:
Re: Subsection 110.6(15) of the Income Tax Act
This is in reply to your letter of August 20, 1999, in which you requested our comments regarding subsection 110.6(15) of the Income Tax Act (the "Act"), specifically as it relates to the valuation of a corporately owned joint (last to die) or multi life insurance policy.
You have asked for our opinion in the following hypothetical situation. While the husband and wife were still alive, the farm corporation underwent a share exchange under section 51 of the Act, whereby the husband (100% shareholder) exchanged $4,000,000 worth of common shares with non-voting, redeemable, retractable, preference shares. The $4,000,000 represents approximately 40% of the fair market value of the farm corporation at that time. Immediately after the share exchange, while the husband and wife were alive, the family farm corporation purchased a joint (last to die) or multi life insurance policy on the lives of the husband and wife. The policy has a death benefit of $4,000,000 and the farm corporation is the sole beneficiary. The wills of the husband and wife document their intent to give all the shares of the farm corporation to the surviving spouse. On the passing of the last surviving spouse, the wife in this situation, the shares of the farm corporation will go to their two children. The death benefit of $4,000,000 from the life insurance policy will be paid at that time to the farm corporation. The cash surrender value of the policy is $100,000 at this time. The cash surrender value of $100,000 is less than 10% of the fair market value of the farm's assets used in an active business. The common shares of the farm corporation go directly to the child who is interested in farming. The preference shares with a redemption value of $4,000,000 go directly to the child who is not interested in farming. Within the required 24 months, the farm corporation redeems its preference shares held by the child not interested in farming using the life insurance proceeds. The other child will be left as the sole shareholder of the farm corporation.
The issue you are enquiring about is with respect to the interpretation of paragraph 110.6(15)(a) of the Act, specifically as it relates to the valuation of a corporately owned joint or multi life insurance policy on the lives of its shareholders and where the corporation is the beneficiary. Paragraph 110.6(15)(a) of the Act states "where a person (in this subsection referred to as the "insured"), whose life was insured under an insurance policy owned by a particular corporation, owned shares of the capital stock (in this subsection referred to as the "subject shares") of the particular corporation...". In your view, paragraph 110.6(15)(a) of the Act would be interpreted in a manner that would value the insurance policy on death at its cash surrender value of $100,000 rather than at its death benefit of $4,000,000. If paragraph 110.6(15)(a) of the Act is interpreted to include a joint (last to die) or multi life insurance policy, the cash surrender value of $100,000 will be used to value the policy when valuing the assets of the farm corporation, at any time before the death of the insured, in accordance with subparagraph 110.6(15)(a)(i) of the Act. You are concerned that a strict interpretation of paragraph 110.6(15)(a) of the Act would mean that "a person whose life was insured under an insurance policy" in the above subparagraph is singular and no other person can be named on the insurance policy in question. This strict interpretation would disqualify joint (last to die) or multi life insurance policies. It is your view that a joint (last to die) or multi life insurance policy should be valued at its cash surrender value when valuing the assets of the farm corporation at any time before the death of the insured. In addition, to support your position, you contend that the Interpretation Act provides that the singular can be read to mean the plural and vice versa.
We agree with your analysis. In your letter, you refer to paragraph 110.6(15)(a) of the Act which states "where a person (in this subsection referred to as the "insured"), whose life was insured under an insurance policy owned by a particular corporation, owned shares of the capital stock (in this subsection referred to as the "subject shares") of the particular corporation...". In our view, the fact that more than one person's life is insured under a life insurance policy owned by a corporation would not, by itself, mean that the requirements of paragraph 110.6(15)(a) of the Act would not be met. Accordingly, in the hypothetical situation described in your correspondence, it is our opinion that subparagraph 110.6(15)(a)(i) of the Act would apply, and the joint (last to die) insurance policy prior to death would be valued at its cash surrender value of $100,000.
As you have not enquired about the application of subparagraph 110.6(15)(a)(ii) of the Act and its application may not be relevant to the situation of which you have a concern, we have not provided our comments thereon.
We trust our comments will be of assistance to you.
Yours truly,
J. Wilson
A/ Director
Business and Publications Division
Income Tax Rulings Directorate
Policy and Legislation Branch
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