2002 Ruling 2001-0114863 - PARTNERSHIP LIFE INSURANCE

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 CCRA.

Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ADRC.

Principal Issues:

1) Where a partnership acquires life insurance on the lives of its principals, whether upon the death of a principal the insurance proceeds, net of the adjusted cost basis of the policy, received by the partnership and paid to the partner, which is a professional corporation wholly-owned by the principal, would be added to that corporation's CDA by virtue of subparagraph (d)(ii) of the definition in 89(1);
2) Whether the insurance proceeds, net of the adjusted cost basis of the policy, would be added to the adjusted cost base of the partnership interest owned by the deceased principal by virtue of 53(1)(e)(iii);

3) Whether 103(1) and 103(1.1) would apply to allocate a portion of the life insurance proceeds to each partner in these circumstances.

Position:

1) Yes;
2) Yes;
3) No

Reasons:

Legislation

XXXXXXXXXX 							2001-011486

XXXXXXXXXX, 2002

Dear XXXXXXXXXX:

Re: Advance Income Tax Ruling
XXXXXXXXXX

This is in reply to your letter of XXXXXXXXXX in which you request an advance tax ruling on behalf of the above-named taxpayers. We also acknowledge the information provided in your subsequent correspondence and during our various telephone conversations in connection with your request (XXXXXXXXXX).

We understand that, to the best of your knowledge and that of the taxpayers referred to above, none of the issues involved in the ruling request is:

(i) in an earlier return of the taxpayers or a related person;

(ii) being considered by a tax services office or taxation centre in connection with a previously filed tax return of the taxpayers or a related person;

(iii) under objection by the taxpayers or a related person;

(iv) before the courts or, if a judgment has been issued, the time limit for appeal to a higher court has not expired; or

(v) the subject of a ruling previously issued by the Directorate.

In this letter, unless otherwise indicated, all statutory references are to the provisions of the Income Tax Act, R.S.C. 1985, 5th Supplement, c.1, as amended, (the "Act"), and all terms used herein that are defined in the Act have the meaning given in such definition unless otherwise indicated.

Our understanding of the facts, proposed transactions and their purposes is as follows:

Definitions

1. The following terms have the meanings specified:

a) "CCRA" means Canada Customs and Revenue Agency;

b) "Partners" means XXXXXXXXXX;

c) "Parnership" means XXXXXXXXXX; and

d) "Principals" means XXXXXXXXXX.

Facts

2. The Partnership is a Limited Liability Partnership carrying on a professional practice of providing XXXXXXXXXX services. Each of the XXXXXXXXXX Partners of the Partnership is a Canadian-controlled private corporation within the meaning of subsection 125(7). Each of the XXXXXXXXXX Principals is the sole shareholder of their respective professional corporation, each of which is a Partner. The tax services office of the Partnership, the Partners, and the Principals is the XXXXXXXXXX Tax Services Office and they file at the XXXXXXXXXX Taxation Centre.

3. XXXXXXXXXX of the Partnership Agreement dated XXXXXXXXXX provides that upon the withdrawal of a Partner from the Partnership as a result of the death of a Principal the withdrawing Partner will be entitled to receive any amount it its capital account and additional income equal to XXXXXXXXXX% of the net fees earned by the Partnership in respect of the Partner's managed clients for XXXXXXXXXX years following the death of the Principal. In addition, XXXXXXXXXX of the Partnership Agreement provides that a portion of the insurance proceeds from policies the Principals are required to acquire on their own lives will be paid to the Partnership for the benefit of the remaining Partners and a portion is to be paid to the Principal's designated beneficiary.

4. The Partnership has recently entered into XXXXXXXXXX term life insurance contracts in respect of each of the Principals. The beneficiary and policyholder of each of the policies is the Partnership and the insureds are the Principals. The total death benefit in respect of each Principal thereunder is $XXXXXXXXXX. The purpose of the life insurance is to assist the settlement by the Partnership of the Partners partnership interest upon the death of the respective Principal.

5. The total amount of the death benefit in respect of each of the Principals is approximately XXXXXXXXXX% of the average managed billings per partner, a typical estimate of the value of a partnership interest in similar acquisitions of practices in the industry.

Proposed Transaction

6. The Partnership Agreement is to be amended to provide that upon the death of a Principal the entire proceeds of the respective insurance policy which will be received by the Partnership will be allocated to that Principal's professional corporation's capital account (XXXXXXXXXX).

7. The Partnership Agreement will be further amended to provide that upon the death of a principal the respective professional corporation's (the Partner's) partnership interest will not automatically cease, but will continue until the insurance proceeds are received by the Partnership, allocated and paid to the respective Partner (XXXXXXXXXX).

8. The Partnership Agreement will also provide that when a Partner withdraws from the Partnership as a result of its Principal's death, the entire amount of the insurance proceeds allocated to the Partner's capital account shall be paid to the Partner immediately following its receipt and that any remaining amount in the Partner's capital account will be paid to the Partner, without interest, in XXXXXXXXXX payments (XXXXXXXXXX).

9. The Partnership Agreement will stipulate that in the event of a withdrawal by a Partner the amount to be paid to the withdrawing Partner as full and final settlement of that Partner's Partnership Interest will be the amount determined in accordance with XXXXXXXXXX
Purpose of proposed transactions

10. The overall purpose of the transactions is to provide for the settlement of the partnership interest of a Partner whose sole shareholder has died through the allocation to the Partner's capital account of the insurance proceeds received by the Partnership as a result of the Principal's death.

Rulings

Provided that the preceding statements constitute a complete and accurate disclosure of all the relevant facts, proposed transactions, and purpose of the proposed transactions, and provided further that the proposed transactions are carried out as described above, our rulings are as follows:

We confirm that

A. An amount equal to the insurance proceeds allocated to a particular Partner, as described in paragraph 6 above, and paid by the Partnership to the deceased Principal's professional corporation (Partner), as described in paragraph 8 above, in excess of the adjusted cost basis, as defined in subsection 148(9), of the particular policy may be added to that professional corporation's capital dividend account pursuant to paragraph (d) of the definition of "capital dividend account" in subsection 89(1).

B. An amount equal to the insurance proceeds allocated to a particular Partner, as described in paragraph 6 above, and paid to the Partnership immediately before the Principal's death as described in paragraph 8 above, in excess of the adjusted cost basis, as defined in subsection 148(9), of the particular policy may be added to the adjusted cost base of the partnership interest owned by that professional corporation pursuant to subparagraph 53(1)(e)(iii).

C. Subsections 103(1) and (1.1) will not be applied solely by virtue of the proposed amendments to the Partnership Agreement described in paragraphs 6 to 9 above to reallocate the insurance proceeds.

In our opinion, in calculating the at-risk amount of a Partner, the value of the life insurance policy on the life of the respective Principal will constitute an amount or benefit for the purposes of paragraph 96(2.2)(d) of the Act and, therefore will result in a reduction of the "at-risk amount" (within the meaning assigned by subsection 96(2.2) of the Act) of that Partner in respect of the Partnership.

The above rulings are given subject to the limitations and qualifications set forth in Information Circular 70-6R4 dated January 29, 2001 and are binding on the Canada Customs and Revenue Agency provided that the proposed transactions are completed before XXXXXXXXXX.

Yours truly,

Manager
Financial Institutions Team
Financial Industries Division
Income Tax Rulings
Policy and Legislation Branch