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: Addition of excess of the proceeds paid on death of the insured over ACB of the life insurance policy to a corporation's CDA when the actual payment is made to a third party as directed by the corporation that is the beneficiary under the policy. Does the doctrine of constructive receipt apply?
Position: Question of fact but we generally accept that where the corporation has not otherwise disposed of its interest in the policy and it remains the beneficiary under the policy that the doctrine of constructive receipt can apply such that an addition to the corporation's CDA for the excess of the insurance proceeds over the ACB of the policy is possible.
Reasons: The law.
XXXXXXXXXX 1999-001356
Attention: XXXXXXXXXX
February 1, 2000
Dear Sirs:
Re: Calculation of Capital Dividend Account
This is in reply to your facsimile letter dated August 4, 1999, which we received December 2, 1999 wherein you requested our views on the computation of a corporation's "capital dividend account" as that term is defined in subsection 89(1) of the Income Tax Act (the "Act") in the following situation.
In your letter you describe a situation where a corporation owns an interest in a life insurance policy insuring the life of one of its shareholders ("Mr. B") and under which the corporation became a beneficiary after June 28, 1982. The insurance proceeds are to be used to fund the redemption of Mr. B's shares from his estate in the event of Mr. B's death. Pursuant to a shareholder's agreement entered into between Mr. B and the other shareholders of the corporation, in the event of Mr. B's death the corporation is required to direct the life insurance company to pay the life insurance proceeds directly to Mr. B's estate as proceeds of redemption of the shares of the corporation which will then be owned by Mr. B's estate.
Your question is whether the corporation would be entitled to include the excess of the life insurance proceeds over the life insurance policy's "adjusted cost basis", as that term is defined by subsection 148(9) of the Act, in its capital dividend account based on the doctrine of constructive receipt, notwithstanding the fact that such proceeds are to be paid directly to Mr. B's estate.
Your request appears to relate to either a proposed transaction or a completed transaction. Confirmation of the income tax consequences of proposed transactions involving specific taxpayers will only be provided in response to a request for an advance income tax ruling. To make such a request the advance income tax ruling must be submitted in accordance with the guidelines set out in Information Circular 70-6R3 (IC-70-6R3) dated December 30, 1996. However, if the situation relates to a completed transaction a request for the Canada Customs and Revenue Agency's views must be made to your local Tax Services Office. Although we are not able to comment specifically on the situation described in your letter, we can offer the following comments.
In Technical News #10 dated July 11, 1997 we stated that where a corporation assigned its interest in a life insurance policy as collateral for securing indebtedness of the corporation (i.e., the assignment does not result in an absolute assignment), and the corporation otherwise remained a beneficiary under the policy, such corporation will still be considered to have constructively received the life insurance proceeds even though such proceeds are actually paid directly to the creditor. In this regard, it should be noted that an assignment of an interest in a life insurance policy as collateral for securing indebtedness does not result in a disposition of an interest in the life insurance policy based on the definition of "disposition" in subsection 148(9) of the Act.
In situations other than the one described immediately above, it remains a question of fact which can only be determined upon a review of all the relevant information as to whether a particular corporation will be considered to have disposed of its interest in a life insurance policy for the purposes of the Act or whether it remains as a beneficiary under such a policy. However, where a shareholder agreement does not result in a disposition of the corporation's interest in the life insurance policy and the corporation remains the beneficiary under the particular policy, the fact that the life insurance proceeds may be paid at the direction of the corporation to a third party would not, by itself, cause us to consider that the corporation did not otherwise constructively receive such life insurance proceeds.
We would like to point out that even if a corporation will be considered as having constructively received the life insurance proceeds, it is possible that the direct payment of such proceeds by a life insurer to a shareholder could result in the amount being paid to a shareholder before a corporate resolution is passed authorizing the share redemption; the amount of any deemed dividend arising on the share redemption to be in excess of the amount of the corporation's capital dividend account immediately before that time; or the dividend being paid before the capital dividend election is filed. Please refer to IT-66R6 Capital Dividends for additional comments on some of these matters.
Our comments are provided in accordance with the practice described in paragraph 22 of IC-70-6R3.
Yours truly,
for Director
Reorganizations and International Division
Income Tax Rulings Directorate
Policy and Legislation Branch
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