5 December 2002 External T.I. 2002-0166375 - CAPITAL DIVIDEND ACCOUNT

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:

Request that we reconsider the position in paragraph 6 of IT-430R3

Position: Same.

Reasons: Legislation

XXXXXXXXXX 						2002-016637
K. Cooper, LL.B.
December 5, 2002

Dear XXXXXXXXXX:

Re. Life Insurance Proceeds and Capital Dividend Account

This is in reply to your letter dated October 1, 2002 in which you requested that the CCRA reconsider its position with respect to the determination of which party is entitled to include the proceeds of a life insurance policy used to secure corporate indebtedness in its capital dividend account ("CDA").

Written confirmation of the tax implications inherent in particular transactions is given by this Directorate only where the transactions are proposed and are the subject matter of an Advance Income Tax Ruling request. Where the particular transactions are completed, the inquiry should be addressed to the relevant Tax Services Office. However, we are prepared to provide the following comments.

Subparagraph (d)(ii) of the definition of "capital dividend account" in subsection 89(1) of the Income Tax Act (the "Act") permits the inclusion in a corporation's CDA of proceeds of a life insurance policy, in excess of the adjusted cost basis of the policy to the corporation, received by the corporation as a consequence of the death of any person. In our view, the key requirement of this subparagraph for the purposes of determining whether the life insurance proceeds will be included in the corporation's CDA is that the proceeds must be "received" by the corporation in consequence of the death of a person. This was the basis for the position expressed in paragraph 6 of IT-430R3, the letter dated April 8, 1997 to which you refer, and Income Tax Technical News No. 10 ("ITTN #10")

Paragraph 6 of IT-430R3 was changed to provide that a debtor cannot add the proceeds of a life insurance policy to its CDA when the proceeds are received directly by the lender as absolute assignee or beneficiary even if the debtor pays the premiums because it cannot be said that the debtor received the proceeds as required by the definition of CDA.

Paragraph 6 was intended to address two situations: where the debtor pays the premiums but the creditor is the policyholder and beneficiary and where the debtor as policyholder and beneficiary absolutely assigns the policy to the creditor as security against indebtedness. In both situations, the debtor is not entitled to include the proceeds in its CDA because it does not receive, constructively or otherwise, the life insurance proceeds. The view in respect of collateral assignments (which are distinct from absolute assignments) expressed in ITTN #10 was that although the creditor may directly receive the proceeds of a life insurance policy as a result of the collateral assignment, the debtor is in constructive receipt of such proceeds.

We understand that you disagree with our interpretation on the basis of your submission that in each of the situations above the debtor corporation has "received" the proceeds (all that the creditor has received is a return of loaned amounts with interest). We do not agree and maintain that for the purpose of determining who has "received" the life insurance proceeds the legal effect of the arrangements between the parties cannot be ignored. Further, with respect to your policy argument that where the debtor corporation pays premiums for insurance in order to secure its indebtedness to a creditor it should be entitled to the inclusion of the life insurance proceeds in its CDA, we note that there is no such criteria in the Act. Should you wish to pursue these concerns further, we suggest that you contact the Tax Policy Branch of the Department of Finance, who are responsible for tax policy, by writing to L'Esplanade Laurier, 140 O'Connor Street, Ottawa, Ontario, K1A 0G5.

We hope that our comments will be of assistance.

Yours truly,

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