Principal Issues:
1. Whether the assignment of a corporation's life insurance policy to a bank as partial security on a debt was a collateral or absolute assignment.
2. Whether life insurance proceeds received by the estate of the guarantor of the debt are taxable.
Position:
1. Question of law. In this case, the documentation provided suggests that the assignment of the life insurance policy was intended to be a collateral assignment.
2. If the guarantor had not died, the proceeds would have been taxed as a capital gain.
Reasons:
1. Documentation provided to us by the TSO.
2. Based on the premise that the original assignment to the bank was a collateral assignment, the bank transferred all its rights and interest in the policy to the guarantor when the guarantor paid the corporation's debt to the bank. The guarantor had claimed allowable business investment losses in respect of the amounts paid. Therefore, the life insurance proceeds would be considered a recovery of a bad debt and subject to tax as a capital gain. However, in this case, the guarantor died prior to receiving the proceeds with the result that paragraph 70(5)(a) would apply to deem the capital debt to have been disposed of for proceeds equal to fair market value.