5 October 2018 APFF Financial Strategies and Instruments Roundtable Q. 1, 2018-0761521C6 F - Life insurance policy as share redempt. proceeds

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148(7), 55(2)

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This translation was prepared by Tax Interpretations Inc. The CRA did not issue this document in the language in which it now appears, and is not responsible for any errors in its translation that might impact a reader’s understanding of it or the position(s) taken therein. See also the general Disclaimer below.

Principal Issues: Whether a shareholder receiving an interest in a life insurance policy from a corporation as redemption proceeds for preferred shares the shareholder previously owned in the corporation should be considered as having given consideration for the interest in the life insurance policy?

Position: Yes.

Reasons: Based on the meaning of the word "consideration", we are of the view that the shareholder is giving consideration for purposes of clause 148(7)(a)(ii)(B) when its shares are being redeemed. As we did in the case of a transfer of an interest in a life insurance policy through the payment of a dividend in kind, we will bring this issue to the attention of the Department of Finance as it appears questionable that the result under subsection 148(7) be different depending on whether the policy is transferred through a dividend in-kind or rather as proceeds for the redemption of shares.

FINANCIAL STRATEGIES AND INSTRUMENTS ROUNDTABLE 5 OCTOBER 2018
2018 APFF CONFERENCE

Question 1

Transfer of a life insurance policy by way of a dividend in kind or a redemption of preferred shares

At the Canadian Life and Health Insurance Association (CLHIA) Roundtable held on May 18, 2017, the Canada Revenue Agency ("CRA") confirmed that the transfer of a life insurance policy held by a subsidiary to its parent corporation may be by way of a dividend in kind, and such dividend must be equal to the fair market value ("FMV") of the policy. However, the proceeds of disposition to the subsidiary are equal to the greater of the cash surrender value and the adjusted cost base ("ACB") since the payment of a dividend does not constitute the giving of consideration. The CRA referred to Algoa Trust v. The Queen (footnote 1), according to which the payment of a dividend constitutes a transfer for no consideration for the purposes of section 160 of the Income Tax Act (footnote 2). In addition, there is another more recent case, Canada v. Gilbert (footnote 3) of the Federal Court of Appeal, which states in paragraphs 11 to 14 that there is no consideration given on the payment of a dividend by a corporation to its shareholder.

That being said, we would now like to know whether the CRA's interpretation would be the same if, instead of paying a dividend in kind so as to transfer the policy to the parent company, the subsidiary redeemed a number of preferred shares having the fair market value of the policy. Here is the example that was given:

Cash surrender value of the policy: $50,000

ACB: $25,000

Fair Market Value: $100,000

Under subsection 148(7) of the Act, the proceeds of disposition for the subsidiary are equal to the greater of:

a) Cash surrender value: $50,000

b) Consideration given: ?

c) ACB: $25,000

Question to the CRA

Is the redemption of shares the giving of consideration? If so, is it correct to say that the proceeds of disposition for the subsidiary will be equal to $100,000 and that it will have to report a gain on the policy of $75,000 ($100,000 - $25,000) while in the case of a dividend in kind, the subsidiary would be taxed on a gain of $25,000 ($50,000 - $25,000)?

CRA Response

The jurisprudence indicates that the word "consideration" is a broad term, which can be either a right, an interest, a profit or a benefit for one party, or a waiver, a disadvantage, a loss or a liability for the other party.

A shareholder who receives property from a corporation in connection with the repurchase of the shareholder’s shares by the corporation disposes of those shares to the corporation in exchange for the property the shareholder receives. In the absence of an indication to the contrary in the context, it appears to us that the word "consideration" must, for the purposes of subsection 148(7), receive the broad meaning generally accorded to it in the jurisprudence. Thus, for purposes of clause 148(7)(a)(ii)(B), where, on a share redemption, the redemption price paid by a corporation is an interest in a life insurance policy that the corporation transfers to the shareholder, the CRA is of the view that the shareholder gave consideration (the redeemed shares) to the corporation for the interest thus transferred.

The CRA is aware that in light of that conclusion, the result differs depending on whether the transfer of interest is by way of a dividend in kind or a redemption of shares. It is not clear that that inconsistency is consistent with tax policy. At the CLHIA Roundtable in May 2017, the CRA indicated that it was not clear that the result, in the case of a dividend-in-kind transfer, was consistent with tax policy. The CRA also indicated that it had notified the Department of Finance of this situation. The CRA will also bring to its attention its conclusion where the transfer occurs as part of a share redemption.

Finally, note that in the presence of a taxable inter-corporation dividend (actual or deemed), the potential application of subsection 55(2) should be considered, depending on the facts and circumstances of a particular situation.

Mélanie Beaulieu
(613) 670-8905
5 October 2018
2018-076152

FOOTNOTES

Due to our system requirements, footnotes contained in the original document are reproduced below:

1 93 DTC 405 (TCC).

2 R.S.C., 1985, c. 1 (5th Supp.) (“ITA”).

3 2007 FCA 136.

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Text of Severed Letter

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: Whether a shareholder receiving an interest in a life insurance policy from a corporation as redemption proceeds for preferred shares the shareholder previously owned in the corporation should be considered as having given consideration for the interest in the life insurance policy?

Position Adoptée: Yes.

Raisons: Based on the meaning of the word "consideration", we are of the view that the shareholder is giving consideration for purposes of clause 148(7)(a)(ii)(B) when its shares are being redeemed. As we did in the case of a transfer of an interest in a life insurance policy through the payment of a dividend in kind, we will bring this issue to the attention of the Department of Finance as it appears questionable that the result under subsection 148(7) be different depending on whether the policy is transferred through a dividend in-kind or rather as proceeds for the redemption of shares.

TABLE RONDE SUR LA FISCALITÉ DES STRATÉGIES FINANCIÈRES ET DES INSTRUMENTS FINANCIERS DU 5 OCTOBRE 2018
APFF – CONGRÈS 2018

Question 1

Transfert d’une police d’assurance vie par voie d’un un dividende en nature ou un rachat d’actions privilégiées

Lors de la Table ronde de l’Association canadienne des compagnies d’assurances de personnes (« ACCAP ») qui a eu lieu le 18 mai 2017, l’Agence du revenu du Canada (« ARC ») a confirmé que le transfert d’une police d’assurance vie détenue par la filiale à sa société mère peut se faire par voie d’un un dividende en nature, et que ce dividende doit être égal à la juste valeur marchande (« JVM ») de la police. Toutefois le produit de disposition pour la filiale est égal au plus élevé de la valeur de rachat et du coût de base rajusté (« CBR »), puisque le paiement d’un dividende ne constitue pas une contrepartie donnée. L’ARC s’est référée à la cause Algoa Trust c. La Reine (footnote 1), selon laquelle le versement d’un dividende constitue un transfert sans contrepartie aux fins de l’article 160 de la Loi de l’impôt sur le revenu (footnote 2). De plus, il existe une autre cause plus récente soit la décision Canada c. Gilbert (footnote 3) de la Cour d’appel fédérale, dans laquelle on peut lire aux paragraphes 11 à 14 qu’il y a absence de contrepartie donnée lors d’un paiement de dividendes d’une société à son actionnaire.

Ceci étant dit, nous aimerions savoir aujourd’hui si l’interprétation de l’ARC serait la même si au lieu de verser un dividende en nature pour effectuer le transfert de la police à la société mère, la filiale procédait au rachat d’un nombre d’actions privilégiées équivalant à la juste valeur marchande de la police. Voici l’exemple qui était donné :

Valeur de rachat de la police :		  50 000 $
CBR		 :			  25 000 $
Juste valeur marchande :             	100 000 $

Selon le paragraphe 148(7) L.I.R., le produit de disposition pour la filiale est égal au plus élevé de :

a) Valeur de rachat :		  50 000 $
b) Contrepartie donnée :	                   ?
c) CBR :				  25 000 $

Question à l’ARC

Le rachat d’actions constitue-il une contrepartie donnée? Si oui, est-ce exact d’affirmer que le produit de disposition pour la filiale sera égal à 100 000 $ et qu’elle devra déclarer un gain sur police de 75 000 $ (100 000 $ – 25 000 $) alors que dans le cas d’un dividende en nature, la filiale s’imposera sur un gain de 25 000 $ (50 000 $ – 25 000 $)?

Réponse de l’ARC

La jurisprudence indique que le mot « contrepartie » est un terme vaste, qui peut être soit un droit, un intérêt, un profit ou un avantage pour une partie, soit une renonciation, un désavantage, une perte ou une responsabilité pour l’autre partie.

L’actionnaire qui reçoit un bien d’une société dans le cadre du rachat de ses actions par la société dispose de ses actions en faveur de la société en échange du bien qu’il reçoit. En l’absence d’indication contraire du contexte, il nous apparaît que le mot « contrepartie » doit recevoir, aux fins du paragraphe 148(7) L.I.R., le sens large que la jurisprudence lui reconnaît généralement. Ainsi, aux fins de la division 148(7)a)(ii)(B) L.I.R., lorsque, dans le cadre d’un rachat d’actions, le prix de rachat payé par la société est un intérêt dans une police d’assurance vie que la société transfère à l’actionnaire, l’ARC est d’avis que l’actionnaire donne une contrepartie (les actions rachetées) à la société pour l’intérêt ainsi transféré.

L’ARC est consciente qu’à la lumière de cette conclusion, le résultat diffère selon que le transfert de l’intérêt s’effectue par voie de dividende en nature ou par voie de rachat d’actions. Il n’est pas clair que cette divergence est conforme à la politique fiscale. Lors de la table ronde de l’ACCAP en mai 2017, l’ARC avait indiqué qu’il n’était pas clair que le résultat, dans le cas d’un transfert par voie de dividende en nature, était conforme à la politique fiscale. L’ARC avait aussi indiqué avoir avisé le ministère des Finances de cette situation. L’ARC portera également à son attention sa conclusion lorsque le transfert s’opère dans le cadre d’un rachat d’actions.

Notons enfin qu’en présence d’un dividende imposable inter-sociétés (réel ou réputé), il y aurait lieu de considérer l’application potentielle du paragraphe 55(2) L.I.R., selon les faits et circonstances propres à une situation donnée.

Mélanie Beaulieu
(613) 670-8905
Le 5 octobre 2018
2018-076152

FOOTNOTES

En raison des exigences de nos systèmes, les notes de bas de page contenues dans le document original sont reproduites ci-dessous :

1 93 DTC 405 (C.C.I.).

2 L.R.C. (1985), ch. 1 (5e suppl.) (« L.I.R. »).

3 2007 CFA 136.

Summaries

Summary Under

Tax Topics - Income Tax Act - Section 148 - Subsection 148(7)

more gain will be realized if an appreciated life insurance policy is distributed as redemption proceeds rather than a dividend-in-kind

2017-0690331C6 found that a dividend-in-kind by a subsidiary to its parent of a life insurance policy would result in proceeds of disposition to it equal to the greater of the policy’s cash surrender value (CSV) and its adjusted cost basis (ACB), rather than equaling the policy’s higher fair market value (FMV), given that the dividend would not result in consideration being given for the policy. If the subsidiary instead transfers a policy with a CSV and ACB of $50,000 and $25,000, respectively, on the redemption of preferred shares having an FMV equal to the policy’s FMV of $100,000, would its proceeds of disposition be $100,000 notwithstanding that the proceeds would only have been $50,000 if there instead had been a dividend-in-kind?

In effectively answering “$100,000,” CRA stated:

[T]he word "consideration" must, for the purposes of subsection 148(7), receive the broad meaning generally accorded to it in the jurisprudence … [so that where] on a share redemption, the redemption price paid by a corporation is an interest in a life insurance policy that the corporation transfers to the shareholder, the CRA is of the view that the shareholder gave consideration (the redeemed shares) to the corporation for the interest thus transferred.

CRA went on to note that the different treatment for a redemption may reflect an anomalous treatment for a dividend-in-kind, which has been brought to Finance’s attention.

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5 October 2018 APFF Financial Strategies and Instruments Roundtable Q. 1, 2018-0761521C6 F - Life insurance policy as share redempt. proceeds

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