8 May 2012 CALU Roundtable Q. 7, 2012-0435661C6 - Shareholder Benefit - Co-Ownership Life Insurance

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.

Principales Questions: Holdco and Subco purchase together a permanent life insurance policy (split-dollar insurance). Holdco is the owner of the cash surrender value of the policy and Subco is entitled to the death benefit attributable to mortality gain. Subco pays the entire amount of premium and Holdco will reimburse its portion of the premiums.
1) Whether Holdco will have a shareholder benefit under subsection 15(1)?
2) Whether section 9, paragraph 12(1)(x) or subsection 246(1) apply?

Position Adoptée: 1) Question of facts but there is a potential for Subco to confer a benefit on the shareholder through the premium sharing arrangement.
2) Question of facts

Raisons: 1) Where the premium paid by the shareholder is less than that which would be paid for comparable rights available in the market under a separate insurance policy, the corporation may be viewed as having conferred a benefit to the other.

CALU CRA Roundtable - May 2012

Question 7 – Co-Ownership of a Life Insurance Policy

Background

At the 2010 CALU Roundtable, the CRA was asked about the tax consequences of an arrangement between a parent and subsidiary corporation where one was the policyholder and the other was the beneficiary of the policy. In considering the various fact patterns posed, the CRA commented that depending on the facts subsection 15(1) of the Act would or would not apply, but also commented that subsection 246(1) and section 9 or paragraph 12(1)(x) of the Act might apply.

Assume the following transactions:

1) Corporation A is a holdco that owns all of the shares of Corporation B, an opco. Corporation A has cash and wishes to invest it for the long term. Corporation B has decided to purchase key man insurance to protect itself from loss and to ensure maintenance of long-term debt covenants.

2) Corporation A and Corporation B decide to purchase together permanent life insurance policy on the life of the key man, and enter into an agreement under which they agree that:

1. Corporation A becomes the owner of the cash surrender value of the policy, and will be entitled to the death benefit attributable to the cash surrender value of the policy.

2. Corporation B will be entitled to the death benefit attributable to mortality gain and not that portion attributable to the cash surrender value of the policy.

3. To effect this result, the corporations jointly make the beneficiary designations on the policy that reflect these different interests in the policy.

4. Corporation A and B further agree that each will fund that portion of premiums under the policy relating to that corporation's respective interest in the policy. For administrative simplicity, Corporation B pays the entire amount of premiums as they become due and payable to the insurer and is reimbursed by Corporation A for its portion of the premium.

Questions

Can the CRA please confirm the following are the tax results of this arrangement:

1) Corporation A will not have a shareholder benefit under subsection 15(1) of the Act, assuming that Corporation B pays the fair market value premium cost of insurance for its interest in the policy.

2) Corporation B will not be subject to an assessment under paragraph 9 or 12(1)(x) of the Act in respect of Corporation A’s portion of the premium as a result of the reimbursement it receives from Corporation A. (As noted above, this assumes that Corporation A reimburses Corporation B for the fair market value premium cost of insurance for its interest in the policy).

3) Neither Corporation A nor Corporation B will be subject to an assessment under subsection 246(1) of the Act assuming each funds the fair market value premium cost of insurance for their respective interests in the policy.

CRA Response

The questions request confirmation of the income tax result of a particular arrangement. Given the broad variations in insurance policies and products, the CRA has not adopted any general positions with respect to split dollar arrangements or other shared ownership arrangements. The terms and conditions of these contracts are so flexible that they can only be commented on by reviewing a specific life insurance contract and all the other related agreements which may form part of the particular split dollar arrangement.

However, the CRA has consistently expressed the view that where a life insurance policy is co-owned by a corporation and its shareholder (corporation or individual) pursuant to a split dollar arrangement or other shared ownership arrangement, there is a potential for the corporation to confer a benefit on that shareholder through the premium sharing arrangement. Where the premium paid by the shareholder is less than that which would be paid for comparable rights available in the market under a separate insurance policy, the corporation may be viewed as having conferred a benefit to the shareholder that could result in a shareholder’s benefit for the purpose of subsection 15(1) of the Act.

In this context, in order to determine the application of subsection 15(1), subsection 246(1), section 9 or paragraph 12(1)(x) of the Act, each arrangement must be considered based on its own facts, on a case-by-case basis. Consequently, it is impossible to elaborate on the potential application of those provisions. Such a review would normally be undertaken only in the context of an advance income tax ruling request or an audit.

Catherine Ayotte
(819)243-7306
May 7-8th, 2012
2012-043566