4 June 2001 External T.I. 2001-0072765 - Corporate owned life insurance & safe income

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: What is our general position on the impact of corporate-owned insurance on the calculation of a corporation's safe income on hand? Do the premiums paid reduce safe income on hand? Do increases in the policy's cash surrender value and any benefits received by the corporation under the particular insurance policy increase the corporation's safe income on hand?

Position: Premiums paid should reduce the safe income on hand to the extent that they have not already been deducted in computing the corporation's net income for tax purposes. Increases in the cash surrender value of a corporate-owned exempt insurance policy will not increase the safe income on hand. Benefits would not increase the amount of safe income or safe income on hand of the corporation unless the amount of such benefit is otherwise required to be included in the corporation's net income for income tax purposes.

Reasons: The law.

CALU - Conference for Advanced Life Underwriting (2001)

Question 6

Corporate-Owned Insurance and Safe-Income

Many private corporations own life and/or disability insurance for a key shareholder(s) to help the corporation fund the purchase or redemption of the key shareholder's shares in the event of their death or permanent disability. After the permanent disability or death of a key shareholder, the continuing shareholders of the corporation may wish to sell all or part of their shares in the corporation to new investors. However, to reduce the amount of the capital gain that may otherwise arise on the disposition of their shares of the corporation, the shareholders may cause the corporation to distribute its safe income on hand as a taxable dividend to its corporate shareholders.

Will the Agency outline its general position on the impact of corporate-owned insurance on the calculation of a corporation's safe income on hand, paying particular attention to the impact of the premiums paid, any increases in the policy's cash surrender value and any benefits received by the corporation under the particular insurance policy.

Agency's Response

The expression "income earned or realized by any corporation after 1971" (generally referred to as "safe income") means a corporation's net income for income tax purposes, as adjusted by paragraphs 55(5)(b), (c) or (d), as the case may be. Consequently, an amount received by a corporation will generally only be included in its safe income to the extent it has been included in the determination of its net income for tax purposes. Similarly, an amount which has been deducted in computing a corporation's net income for tax purposes will reduce the corporation's safe income. In addition, it is the Agency's view that safe income will only contribute to a capital gain on a particular share of the capital stock of a corporation where such income is on hand at that particular time (herein referred to as "safe income on hand") and is available for distribution to the particular shareholder as a dividend. Consequently, in computing the amount of safe income on hand that is attributable to a particular share during the relevant holding period it has been our long standing position that the safe income of a corporation should be reduced by the amount of any actual or potential disbursement or outlay arising in the relevant holding period that has not otherwise been deducted in the calculation of the corporation's safe income and which would reduce the gain inherent in the particular shares of the corporation.

It is also the Agency's position that when a particular shareholder's shares in a corporation are redeemed, the safe income entitlement of other shares of the corporation will not be affected provided that the redemption does not reduce the fair market value of the other shares and it is not part of a plan to avoid tax.

Based on these guidelines, our comments on the issues raised are as follows:

Any premiums paid by a corporation under a life or disability insurance policy would not generally represent amounts which are on hand and available to contribute to any unrealized gain inherent in the corporation's shares and, therefore, should be deducted in computing its safe income on hand to the extent that the premiums have not already been deducted in computing the corporation's net income for tax purposes.

Any annual increase in the cash surrender value of a corporate-owned exempt insurance policy will not be included in computing the safe income of the corporation as such amounts are not included in computing the corporation's net income for tax purposes.

Any benefit received by a corporation under the policy, whether in respect of the death or disability of the key shareholder, would not increase the amount of safe income or safe income on hand of the corporation unless the amount of such benefit is otherwise required to be included in the corporation's net income for income tax purposes. As an example, where a payment is made to a corporation that is the beneficiary and owner of an exempt life insurance policy as a consequence of the death of the person whose life was insured under the particular policy such payment would not give rise to a disposition of the corporation's interest in the policy as defined in subsection 148(9). In these circumstances, since no amount of the death benefit would be included in the corporation's net income for income tax purposes, the safe income or safe income on hand of the corporation would not be increased. The corporation may, however, be able to add the excess of the death benefit received over the adjusted cost basis of the life insurance policy, if any, to its "capital dividend account" as that term is defined in subsection 89(1). The payment of a capital dividend by the corporation would not give rise to the application of subsection 55(2).

Where a death benefit received by a corporation has been used to redeem shares held by the deceased shareholder's estate, the aggregate safe income on hand of the corporation would be reduced by the safe income on hand attributable to the shares that have been redeemed. As noted previously, the safe income entitlement of any other shares of the corporation will not generally be affected provided that the share redemption does not reduce the fair market value of those other shares. For greater certainty, where the deemed dividend arising on the share redemption is a capital dividend and it does not exceed the amount of the corporation's capital dividend account immediately before the share redemption, such capital dividend will not reduce the corporation's safe income on hand.

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