Principal Issues: Whether the "fund value" portion of a payment made under an exempt single-life life insurance policy by an insurer to a corporation as a consequence of the death of the life insured under the policy is "proceeds of life insurance" for purposes of subparagraph (d)(ii) of the definition of capital dividend account in subsection 89(1).
Position: It is always a question of fact whether a payment under any particular life insurance contract is "proceeds of a life insurance policy" which can only be determined by examining the facts of the particular situation. In a particular fact situation where the "fund value" reflects the balance of the investment accounts within an exempt single-life life insurance policy, the "fund value" would generally be considered to be proceeds of life insurance for purposes of subparagraph (d)(ii) of the definition of capital dividend account in subsection 89(1).
Reasons: The phrase "proceeds of a life insurance policy" is not defined in the Act. The investment account value under an exempt life insurance policy is a component of the policy that is considered within the scope of the exempt policy rules in section 306 of the Regulations, as is the case for the face value portion of the policy. The scheme of these rules generally provide for the taxation of amounts received by a policyholder out of the policy prior to the death of the life insured under the policy, but on a tax-free basis where they are paid out as a consequence of the death of the life insured.
