27 July 2001 Internal T.I. 2001-0091157 - CDA AND LIFE INSURANCE PROCEEDS

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 the effective date of our revised position as set out in paragraph 6 of IT-430R3.

Position: The change in position is effective for proceeds of a life insurance policy received on or after February 10, 1997.

Reasons: See the Explanation of Changes to IT-430R3.

								July 27, 2001

SASKATOON TSO						HEADQUARTERS
Joanne Bone							J. Leigh
Business Window - Client Services				(613) 952-1505

									2001-009115

Capital Dividend Account and Life Insurance Proceeds

This is in reply to your facsimile of July 4, 2001 requesting our views on whether the position set out in paragraph 6 of Interpretation Bulletin IT-430R3 applies to a particular situation.

As you know, paragraph 6 of IT-430R3 represents a change in interpretation from that of former paragraph 6 of IT-430R2. Our revised interpretation is that a debtor corporation cannot add to its capital dividend account the proceeds of a life insurance policy when the proceeds are received by the lender as beneficiary even if the debtor corporation pays the premiums. This is because the debtor corporation does not receive, as beneficiary, the life insurance proceeds as required by paragraph (d) of the definition of "capital dividend account" in subsection 89(1) of the Income Tax Act (the "Act"). Pursuant to our previous position, the debtor corporation could include its capital dividend account the proceeds received directly by the lender as beneficiary provided the debtor corporation paid the premiums in respect of the policy. As indicated in the Explanation of Changes to IT-430R3, the change in interpretation is effective for proceeds of a life insurance policy received on or after the date of publication of IT-430R3 (i.e., February 10, 1997).

You described a situation where the proceeds of a life insurance policy were paid to a creditor as beneficiary in 1995 and in 1999 the debtor corporation filed a T2054 in respect of an election under subsection 83(2) of the Act. Given that the proceeds were received prior to February 10, 1997, the debtor corporation would appear to be entitled to add the excess of the life insurance proceeds over the life insurance policy's "adjusted cost basis", as that term is defined in subsection 148(9) of the Act, to its capital dividend account.

We hope that our comments are of assistance.

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

c.c. Brian Helmer
T2 Processing Section, Headquarters