25 July 2012 External T.I. 2012-0446491E5 - Corporate-owned 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.

Principal Issues: Various questions regarding the receipt of a death benefit from a life insurance policy held by a CCPC.

Position: General comments provided.

Reasons: The legislation

XXXXXXXXXX
				T. Elsey
				2012-044649
July 25, 2012

Dear Mr. XXXXXXXXXX:

Re: Corporate-owned life insurance

We are writing in response to your email dated May 1, 2012. In your email, you asked several questions pertaining to the taxation of a death benefit from a corporate-owned life insurance policy.

In the hypothetical situation described, Mr. A owns 100% of the voting shares of an operating company (“Opco”) and 100% of the voting shares of a holding company (“Holdco”). Holdco owns 100% of the preferred shares of Opco. Mrs. A owns 100% of the preferred shares of Holdco. Both Opco and Holdco are Canadian-controlled private corporations (“CCPCs”). Opco obtains a term life insurance policy with no cash surrender value and a death benefit of $1,000,000 on the lives of both Mr. A and Mrs. A. The policy is an exempt policy with joint first-to-die coverage. Opco pays the policy premiums and is the beneficiary of the death benefit under the policy. Opco does not deduct from income the policy premiums for tax purposes.

Written confirmation of the tax implications inherent in particular transactions may only be provided by this Directorate where the transactions are proposed and are the subject matter of an advance income tax ruling submitted in the manner set out in Information Circular 70-6R5, Advance Income Tax Rulings, dated May 17, 2002. This Information Circular and other Canada Revenue Agency ("CRA") publications can be accessed on the Internet at http://www.cra-arc.gc.ca/formspubs/menu-e.html. We are however, prepared to provide the following general comments.

Our Comments

Your first question is whether the death benefit from the corporate-owned life insurance policy on the first death is tax-free to Opco. Generally, pursuant to subsection 148(1) of the Income Tax Act (the “Act”), a policyholder is required to include in income any gain realized upon the disposition of the policyholder’s interest in a life insurance policy. A “disposition” of an interest in a life insurance policy is defined in subsection 148(9) of the Act to include and exclude certain transactions and events. By virtue of paragraph (j) of this definition, a “disposition” does not include a payment made under an exempt life insurance policy as a consequence of the death of a person whose life was insured under the policy. Consequently, the payment of a death benefit from an exempt life insurance policy is not a disposition and therefore can be received tax-free.

Your second question is whether the life insurance proceeds can flow to the shareholders of Opco via the capital dividend account (“CDA”) as a capital dividend. The CDA of a private corporation is defined in subsection 89(1) of the Act and generally includes the amount by which the life insurance proceeds received by the corporation as a consequence of the death of the life insured exceeds the corporation's adjusted cost basis of the policy immediately before that person’s death. Generally, when the capital dividend election is made, a tax-free distribution of this amount can then be made to the shareholders of the corporation pursuant to subsection 83(2) of the Act. Interpretation Bulletin IT-66, Capital Dividends, discusses the procedures required to pay a dividend from a private corporation’s CDA. General information can also be found in Interpretation Bulletin IT-430R3, Life Insurance Proceeds Received by a Private Corporation or a Partnership as a Consequence of Death.

With respect to your third question, you asked whether the fact that Mrs. A’s life is insured under the policy would affect the normal treatment of the receipt of the death benefit for tax purposes. In our view, the fact that the policy covers Mrs. A’s life would not, in and of itself, affect the tax treatment of the death benefit as described above.

Your final question is whether the payment of the life insurance policy premiums by Opco will be considered to be the conferring of a shareholder benefit under subsection 15(1) of the Act if Opco does not deduct the premiums for tax purposes. Generally, premiums paid under a life insurance policy are considered to be on account of capital and therefore are not deductible in computing income pursuant to paragraph 18(1)(b) of the Act. However, a taxpayer may be able to claim a deduction in respect of the life insurance policy premiums in computing the taxpayer’s income from a business or property if the policy is used as collateral for a loan and all of the conditions of paragraph 20(1)(e.2) of the Act are met. The question of whether Opco has conferred a benefit on a shareholder for the purpose of subsection 15(1) of the Act is generally one of fact. However, where a corporation is both the policyholder and the sole beneficiary of a life insurance policy on the life of a shareholder, and the corporation pays the premiums with respect to such policy, it is our view that the payment of the premiums on such a policy would not ordinarily constitute a taxable benefit to the shareholder under subsection 15(1) of the Act.

While we hope that our comments will be of assistance to you, they are given in accordance with the practice referred to in paragraph 22 of IC 70-6R5 and are not binding on the CRA in respect of any particular situation.

Yours truly,

Jenie Leigh
Section Manager
for Division Director
Financial Industries Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch