11 June 2004 External T.I. 2004-0068141E5 - Life Ins. Proceeds Received By Private Corp.

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.

Principal Issues: Does the fact that a private corporation deducted the cost of life insurance premiums in calculating its income effect the addition of the net proceeds of a life insurance policy to its capital dividend account?

Position: No

Reasons: Legislation

XXXXXXXXXX 2004-006814
Shaun Harkin, CMA
June 11, 2004

Dear XXXXXXXXXX:

Re: Technical Interpretation Request: IT-430R3 (Consolidated) Life Insurance Proceeds

This is in reply to your facsimile of March 23, 2004, wherein you request our view on the tax treatment of life insurance proceeds received by a private corporation where the life insurance premium had been deductible in calculating its income. It is your view that the comments in IT-430R3 (Consolidated), Life Insurance Proceeds Received by a Private Corporation or a Partnership as a Consequence of Death, apply only in the situation where the premium on the life insurance policy was not deducted as an expense.

Written confirmation of the tax consequences inherent in a particular transaction or series of transactions are given by this Directorate only where the transaction(s) are proposed and are the subject matter of an advance ruling request submitted in the manner set out in Information Circular 70-6R5. However, we are prepared to provide the following comments.

Our Comments

Paragraph (d) of the definition of "capital dividend account" in subsection 89(1) of the Income Tax Act provides the rules for the addition of net proceeds of a life insurance policy to the capital dividend account of a private corporation. The fact that life insurance premiums may be deducted in calculating its income would not exclude the addition of the net proceeds of a life insurance policy to the capital dividend account of a private corporation. Accordingly, the comments discussed in IT-430R3 (Consolidated) apply regardless of the fact that a private corporation in calculating its income deducted the premiums.

Note that when a life insurance policy has been used to secure the indebtedness of a private corporation with part or all of the proceeds arising upon the death of the person whose life was insured being paid directly to the creditor as beneficiary or as an assignee for security, the entitlement to the addition to the capital dividend account remains with that creditor and not with the private corporation. However, when a life insurance policy has been assigned as collateral for securing indebtedness (as opposed to an absolute assignment of the policy) or is the subject of a hypothecary claim by a creditor, and the debtor remains the beneficiary or policyholder, the proceeds in excess of the adjusted cost basis of the policy would be included in the capital dividend account of the debtor. Please refer to paragraph 6 of IT-430R3 (Consolidated) for further information.

Please refer to IT-309R2, Premiums on Life Insurance Used as Collateral, for information concerning the limited deduction that is available in calculating income from a business or property for premiums payable after 1989 under a life insurance policy when the policy has been assigned to a restricted financial institution as collateral for a loan.

We trust the above comments are of assistance.

Yours truly,

Wayne Antle, CGA
for Director
Business and Partnerships Division
Income Tax Rulings Directorate

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