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: Whether for purposes of subsection 70(5), a policy loan under a life insurance policy, that is outstanding at the time the life insured under the policy dies, would be treated as any other liability of the corporate policyholder in computing the FMV of the shares of the corporation.
Position: Depends.
Reasons: Ordinary valuation principles
CALU - Conference for Advanced Life Underwriting (2003)
Question 6
Valuation of corporate-owned life insurance policy
Assume a corporation owns a life insurance policy on a shareholder's life. The life insurance policy has a cash surrender value (CSV) of $1 million. The corporation receives a policy loan for the full CSV. The funds are used by the corporation to invest in marketable securities. The insured dies before the policy loan has been repaid.
In accordance with subsection 70(5.3) of the Act, in determining the value of the deceased's shares for the purposes of subsection 70(5), the value of the corporate-owned life insurance policy is its CSV, as defined in subsection 148(9). The definition of cash surrender value in subsection 148(9), requires that the CSV be determined without regard to any policy loans and, as a result, the value of the policy used to determine the value of the deceased's shares would be the full $1 million CSV. However, the value of the other assets of the corporation will reflect the $1 million of marketable securities acquired by the corporation with the proceeds of the policy loan.
Will the Agency confirm that, for the purpose of subsection 70(5), the policy loan will be treated as any other corporate liability and thus be taken into account in valuing the deceased's shares?
Agency's Response
Subsection 70(5.3) provides that the value of the insurance policy to be used in valuing the shares of the deceased is to be the cash surrender value of the policy, as defined in subsection 148(9). Accordingly, the amount of an outstanding policy loan immediately before the death of the life insured is not to be considered in valuing the policy as an asset of the corporation. In determining whether the policy loan is otherwise to be considered in valuing the deceased's shares for purposes of subsection 70(5), we would look to ordinary valuation principles.
All rights reserved. Permission is granted to electronically copy and to print in hard copy for internal use only. No part of this information may be reproduced, modified, transmitted or redistributed in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, or stored in a retrieval system for any purpose other than noted above (including sales), without prior written permission of Canada Revenue Agency, Ottawa, Ontario K1A 0L5
© Her Majesty the Queen in Right of Canada, 2003
Tous droits réservés. Il est permis de copier sous forme électronique ou d'imprimer pour un usage interne seulement. Toutefois, il est interdit de reproduire, de modifier, de transmettre ou de redistributer de l'information, sous quelque forme ou par quelque moyen que ce soit, de facon électronique, méchanique, photocopies ou autre, ou par stockage dans des systèmes d'extraction ou pour tout usage autre que ceux susmentionnés (incluant pour fin commerciale), sans l'autorisation écrite préalable de l'Agence du revenu du Canada, Ottawa, Ontario K1A 0L5.
© Sa Majesté la Reine du Chef du Canada, 2003
Email this Content