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: 1) Does 15(1) apply in circumstances where
a) Parentco is the policyholder of a life insurance policy and its subsidiary is the beneficiary.
b) Same situation but Subco reimburses Parentco the payment of the premium.
c) Sisterco 1 and Sisterco 2 are wholly-owned by an individual. Sisterco 1 owns the policy, Sisterco 2 is the beneficiary and would reimburse Sisterco 1 the amount of the premium paid.
2) In situations 1b) and c), will the ACB to the policyholder be affected by the reimbursement?
Position: 1a) No but subsection 246(1) may apply to Subco.
1b) and 1c) Subsection 9 and paragraph 12(1)(x) could apply to include in the income the reimbursement received. Subsection 15(1) is not applicable to Parentco if the reimbursement is included in its income. Subsection 15(1) is not applicable to Sisterco 1.
2)No
Reasons: 1)a),b),c) 15(1) applies to a shareholder who receives a benefit and that determination is a question of fact.
2) 148(9) "Adjusted Cost Basis" definition
CALU - Conference for Advanced Life Underwriting (2010)
Question 2:
Shareholder benefits and corporate-owned life insurance
Situation A
At both the 2009 APFF and Canadian Tax Foundation CRA Roundtables (question #15 at the APFF Roundtable and question #3 at the Foundation's Roundtable), the CRA announced a change in its policy regarding shareholder benefits arising from corporate-owned life insurance policies. Specifically, the CRA considered the situation where the life insurance policy was owned by a wholly-owned subsidiary ("Subco") with the beneficiary of the policy being the shareholder of Subco ("Parentco"). The CRA is now of the view that the payment of premiums by Subco results in a benefit under subsection 15(1) ITA to Parentco. To quote from CRA Views #2009-0347291C6 (which provides both the English and French versions of question #3 from the Foundation's Roundtable), "whether a corporation has conferred a benefit on a shareholder for subsection 15(1) ITA purposes is generally one of fact. The situation described gives rise to an impoverishment of the subsidiary corporation and an enrichment of the parent corporation, and therefore a benefit to the parent corporation".
It is often industry practice to have a structure that is different from the one described above. Under this arrangement, the life insurance policy is owned and paid for by Parentco, with Subco as the revocable beneficiary of the policy. This arrangement is implemented to provide creditor protection for the insurance policy while the life insured is alive, and avoid disposition issues should Subco be sold and Parentco wants to retain ownership of the policy.
Question:
Can the CRA confirm that Parentco will not be subject to subsection 15(1) ITA in the above situation?
Situation B
Assume a similar structure to the one described in Situation A but Subco is designated as the irrevocable beneficiary under the policy owned by Parentco and reimburses Parentco for the insurance premiums paid by Parentco.
It should also be assumed that the amount of premiums paid does, in fact, represent the charge or amount that should be paid by Subco as the ultimate beneficiary of the life insurance proceeds.
It is our view that Subco would not be impoverished by such payment or reimbursement as Subco is only paying an amount that allows the policy to remain in force and ultimately result in the company receiving the insurance proceeds. Similarly, Parentco would not be receiving a benefit as it is not the beneficiary of that part of the life insurance policy for which it is receiving reimbursement from Subco.
Questions:
a. Can the CRA confirm that Parentco would not be subject to subsection 15(1) ITA in the above situation?
b. Can the CRA also comment on whether the adjusted cost basis of the life insurance policy owned by Parentco would be reduced by the amount of any insurance costs reimbursement made by Subco?
Situation C
Instead of a Parentco - Subco relationship, assume there are two companies ("Sisterco 1" and "Sisterco 2") that are wholly-owned by the same shareholder ("Individual A"). Sisterco 1 is the owner of the policy with Sisterco 2 as the beneficiary. Sisterco 2 would reimburse Sisterco 1 the premiums paid (as Subco reimbursed Parentco in the Situation B situation).
In addition to the reasoning described above for the Parentco-Subco situation, subsection 15(1) ITA would not apply to Sisterco 1 as it is not a shareholder of Sisterco 2. It is also our view that subsection 15(1) ITA should not apply to Individual A as there has not been an impoverishment to either company as reviewed above for the Parentco-Subco situation, and Individual A has not been enriched by the premium payments and reimbursements as Individual A is the 100% shareholder of both companies.
Questions:
a. Can the CRA confirm that Sisterco 1 and Individual A would not be subject to subsection 15(1) ITA in the above situation?
b. Would the CRA's opinion be different if Individual A had less than a 100% ownership interest in either company?
c. Can the CRA also comment on whether the adjusted cost basis of the policy owned by Sisterco 1 would be reduced by the amount of any insurance costs reimbursement by Sisterco 2?
CRA's Responses
The question of whether or not a corporation has conferred a benefit on a shareholder for the purpose of subsection 15(1) ITA is generally one of fact.
Generally, the CRA considers that subsection 15(1) ITA would be applicable where a transaction or a series of transactions gives rise to an impoverishment of the corporation and an enrichment of the shareholder. In Del Grande v. The Queen, 93 DTC 133 (T.C.C.), the Court stated the following:
Paragraph 15(1)(c) contemplates the conferral of a genuine economic benefit upon the shareholder. The word "confer" implies the bestowal of bounty or largesse, to the economic benefit of the conferee and a corresponding economic detriment of the corporation.
In our view, Parentco (in Situation A) and Sisterco 1 (in Situation C) would not be subject to subsection 15(1) ITA. However, the provisions of subsection 246(1) ITA could apply to Subco in Situation A.
In Situations B and C, it would be necessary to determine in an actual situation with all the relevant documentation, whether the reimbursement should be included in the income of Parentco (in Situation B) or Sisterco 1 (in Situation C) under section 9 or paragraph 12(1)(x) ITA. Subsection 15(1) ITA would not generally be applicable in Situation B to Parentco where the reimbursement is included in its income. Concerning the application of subsection 15(1) ITA to Individual A in situation C, we can not make a final determination with the facts submitted.
In Situations B and C, the policyholder's adjusted cost basis would not be reduced by the reimbursement of premium received because that reimbursement is not described in the adjusted cost basis definition under subsection 148(9) ITA.
As stated at the CTF-CRA roundtable - 61st Annual Tax conference - 2009 and at the APFF-Round Table on the Taxation of Fiscal Strategies and Instruments - 2009, subsection 245(2) ITA could, depending on the circumstances, apply to adjust the calculation of the amount to be included in the capital dividend account of the corporate beneficiary upon receipt of the proceeds of the life insurance policy.
Catherine Ayotte
2010-035942
613-957-8962
May 4, 2010
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