8 May 2012 Roundtable, 2012-0435641C6 - CALU CRA Roundtable Question 6 – May 2012

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: Whether a corporation can be considered to have received insurance proceeds for the purpose of paragraph (d) in the definition of "capital dividend account" in subsection 89(1)?

Position: Question of fact.

Reasons: Depends on the facts of each scenario provided.

Question 6 – Use of Bare Trustee and CDA

Background

It is not uncommon for shareholders of a corporation to use a buy-sell arrangement which requires the corporation to acquire insurance to fund share purchase obligations under the arrangement. Further, to ease administration of the buy-sell once it has been triggered by the death of a shareholder, the parties may agree to use a third party as a bare trustee or agent to hold the insurance proceeds while the necessary transactions are carried out.

In the 1993 CRA View 9323775, the CRA commented that:

“To be included in the determination of the CDA of a corporation the proceeds must be considered to be received by the corporation. If the amounts are received by a trust, other than a bare trust, and then distributed to the corporation, they are not considered to be insurance proceeds, rather they are a distribution from a trust….

A corporation can be considered to have received the proceeds of a life insurance policy which it owned and on which it paid the premiums where it directed the payments to a third party provided the corporation was the beneficiary under the policy. Also, if amounts are received by an agent of the corporation or trustee of a bare trust, of which the corporation is the settlor and beneficiary, the amounts would be considered to be received by the corporation. It would be a question of fact whether your arrangement constitutes an agency agreement, bare trust or any form of trust. Such a determination can be made only after a thorough review of all of the relevant agreements.”

The CRA has on numerous occasions set out requirements for a trust to be considered a bare trust and thus effectively ignored for the purposes of the Act. The three key requirements are that:

• The trustee does not have significant powers or responsibility and can not take action without instruction from the settlor regarding any aspect of the trust
• The trustee’s sole function is to hold legal title to the property
• The settlor is the sole beneficiary and can cause the property to revert at any time.

Since 1993, subsection 104(1) of the Act has been amended to generally exclude from the definition of trust “an arrangement under which the trust can reasonably be considered to act as agent for all the beneficiaries under the trust with respect to all dealings with all of the trust’s property”.

Assume that a buy-sell agreement (the “Agreement”) has been entered into between the shareholders of Corporation A and Corporation A, which requires Corporation A to repurchase the shares of a shareholder on death and to acquire life insurance on the lives of the shareholders for this purpose. The Agreement has detailed provisions relating to the appointment of a third party to act as trustee for the insurance proceeds (the “Insurance Trustee”). In particular, the Agreement provides that the Insurance Trustee must follow the actions outlined in the Agreement in terms of receiving, holding and disbursing the insurance proceeds and does not otherwise have any significant powers or responsibilities.

Question 6.1

Further assume Corporation A is named as the beneficiary of each life insurance policy, and would be contractually bound to pay any insurance proceeds over to the Insurance Trustee upon receipt. Would the CRA consider Corporation A to have received the insurance proceeds for purposes of its CDA calculation?

CRA Response

A trust for the purposes of the Act is defined in subsection 104(1) of the Act. That subsection provides that, if the arrangement is one in which the trust can reasonably be considered to act as agent for all the beneficiaries under the trust with respect to all dealings with all of the trust’s property and the trust is not a trust described in paragraphs (a) to (e.1) of the definition of trust in subsection 108(1) of the Act, the arrangement is deemed not to be a trust for the purposes of the Act.

A trustee can reasonably be considered to act as agent for a beneficiary when the trustee has no significant powers or responsibilities, the trustee can take no action without instructions from that beneficiary and the trustee’s only function is to hold legal title to the property. In order for the trustee to be considered as the agent for all the beneficiaries of a trust, it would generally be necessary for the trust to consult and take instructions from each and every beneficiary with respect to all dealings with all of the trust property.

Thus if after a thorough review of all the relevant facts including but not limited to the Agreement, the Insurance Trustee can reasonably be considered to act as agent for Corporation A such that the arrangement is deemed not to be a trust for the purposes of the Act and the facts support a conclusion that Corporation A is the only beneficiary, then Corporation A may generally be considered to have received insurance proceeds for purposes of its capital dividend account. Furthermore, it is assumed that in order for Corporation A to be considered to have received the insurance proceeds, the contract requiring Corporation A to pay the insurance proceeds upon receipt to the Insurance Trustee (acting as agent) would not negate the legal entitlement of Corporation A to receive the insurance proceeds.

Question 6.2

Assume instead that Corporation A is named as the beneficiary of each life insurance policy, but has given an irrevocable direction to the insurer to pay the proceeds over to the Insurance Trustee upon the death of a shareholder. Would the CRA consider Corporation A to have received the insurance proceeds for purposes of its CDA calculation?

CRA Response

In the situation described in Question 6.2 and after a thorough review of all the relevant facts including but not limited to the Agreement, if the Insurance Trustee can reasonably be considered to act as agent for its sole beneficiary Corporation A such that the arrangement is deemed not to be a trust for the purposes of the Act, Corporation A may generally be considered to have received insurance proceeds for purposes of its capital dividend account provided that the irrevocable direction given by Corporation A to the insurer would not in any way negate the agency relationship between Corporation A and the Insurance Trustee.

Question 6.3

Assume instead that the insurance policy names the Insurance Trustee as the beneficiary of the policy. The designation would refer to the Insurance Trustee, for example, “as beneficiary in trust as bare trustee for the Corporation”, or simply to the Insurance Trustee without specific reference to its capacity as a bare trustee or agent. Would the CRA consider Corporation A to have received the insurance proceeds for purposes of its CDA calculation?

CRA Response

In the situation described in Question 6.3 and after a thorough review of all the relevant facts including but not limited to the Agreement, if the Insurance Trustee can reasonably be considered to act as agent for its sole beneficiary Corporation A such that the arrangement is deemed not to be a trust for the purposes of the Act, Corporation A would generally be considered to have received insurance proceeds for purposes of its capital dividend account.

S. Bernards
(613) 957-2139
May 8, 2012
2012-043564