20 April 2000 External T.I. 2000-0013825 - DEMUTUALIZATION BENEFIT EMPLOYEES TAX EXEMPT

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: General comments on the tax implications to the employees of a tax exempt entity, on the distribution of the proceeds of the sale of shares received on demutualization of an insurance company under a group plan for which the employer is the policyholder

Position: See letter

Reasons: Draft Legislation

XXXXXXXXXX 2000-001382

April 20, 2000

Dear Sir:

Re: Disbursement of funds received from the demutualization of the XXXXXXXXXX

This is in reply to your letter of March 14, 2000, wherein you requested our comments with respect to the federal income tax implications of distributing funds received on the demutualization of the XXXXXXXXXX in respect of a group insurance policy to the employees who are members of the insurance plan covered by the policy. Written confirmation of the tax implications inherent in particular transactions are given by this Directorate only where the transactions are proposed and are the subject matter of an advance income tax ruling request. Only an advance income tax ruling is binding on the Department, and must be requested in accordance with information circular IC 70-6R. We can however, provide you with the following general comments which we hope will be of assistance to you.

Bill C-25, which was tabled in the House of Commons on December 7, 1999 contains draft amendments to the Income Tax Act (the "Act") relating to the demutualization of insurance corporations. Draft subsection 139.1(16) of the Act, will generally apply where demutualization benefits are received by an employer that is exempt from taxation under Part I of the Act, in respect of a group insurance policy that provides retirement benefits or insurance coverage to its employees, and the employer distributes all or part of the demutualization benefit to the employees covered by the policy.

Where the employer received shares of the insurance company on demutualization, sold the shares and distributed all or a portion of the proceeds from the sale of the shares, the amount of cash proceeds received by an employee will be taxed in the employee's hands as a corporate dividend. The taxable dividend amount will be the sum of the cash payment received, plus a gross-up equal to 25% of the original cash amount. As a result, 125% of the original cash amount will be included in the income of the employee in the year of receipt. The employee will be entitled to claim a dividend tax credit which is equal to two-thirds of the gross-up (25% of the original amount received).

Under draft subsection 139.1(16), the employer will be required to file a T5 Return of Investment Income and issue T5 supplementary slips to each employee that received a payment in respect of the demutualization benefits. This return must be filed for the taxation year in which the employer makes the distribution to the employees. The employer can obtain a copy of the T5 Return of Investment Income forms and related guide by contacting its local Canada Customs and Revenue Agency Taxation Services Office.

At the time of writing, Bill C-25 had received first reading in the House of Commons. Until such time as the legislation is passed by parliament, we will not be able to provide confirmation of the tax consequences of the proposed distribution of demutualization benefits in respect of any particular situation, by way of an advance income tax ruling.

We hope that our comments will be of assistance to you.

Yours truly,

F. Lee Workman
Manager
Financial Institutions Team
Income Tax Rulings Directorate
Policy and Legislation Branch