18 September 2025 Roundtable, 2025-1067931C6 - CLHIA 2025 - Q.2 - Deemed Value of Life Insurance and QSBC

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: 1) Can CRA confirm that the deeming rule in subparagraph 110.6(15)(a)(i) applies in determining whether shares qualify as QSBC shares for purposes of the exception in paragraph 84.1(2)(e) and the proposed CEI legislation? 2) Can CRA cofirm that it is reasonable to administratively use the test in subparagraph 110.6(15)(a)(i) to satisify the condition set out in paragraph (a) of the definition of "qualifying business transfer" in 248(1)?

Position: Yes, No.

Reasons: 1) Subparagraph 110.6(15)(a)(i) applies for the purposes of the definition “QSBC share” in subsection 110.6(1), it also applies for purposes of subsections 84.1(2.31) and (2.32) and for the purposes of the proposed definition of "qualifying Canadian entrepreneur incentive property" in subsection 110.63(1). 2) There is no specific provision that deems a corporate-owned life insurance policy to be valued in a specific manner, the policy would be valued in accordance with normal valuation practices taking into consideration all relevant facts and circumstances.

CLHIA Roundtable – September 2025

Question 2 – Deemed Value Rules for Life Insurance and QSBC shares

Background

Subparagraph 110.6(15)(a)(i) (endnote 1) is a special deeming provision (the deeming provision) which applies for purposes of the following definitions:

• “qualified small business corporation shares” (QSBC shares) (subsection 110.6(1));
• “share of the capital stock of a family farm or fishing corporation” (subsection 110.6(1)) and subsection 70(1); and
• “small business corporation” (subsection 248(1)).

These definitions are relevant in determining if shares of a private corporation (the “particular corporation”) qualify for the lifetime capital gains exemption (LCGE). (endnote 2) They generally require that at the time the taxpayer disposes of shares in a particular corporation, the particular corporation must be a Canadian-controlled private corporation (CCPC) all or substantially all (endnote 3) of the fair market value (FMV) of the assets of which are attributable to assets used principally in an active business carried on primarily in Canada.

The deeming provision provides that where a person (the “insured”) is insured under a life insurance policy owned by a particular corporation, and the insured owns shares of the particular corporation (or certain related corporations), the fair market value of the life insurance policy at any time before the death of the insured shall be deemed to be equal to its cash surrender value. (endnote 4) Thus, in determining the FMV of the assets of the particular corporation for purposes of the noted definitions, the value of any life insurance policy as described in the deeming rule will be equal to the policy’s cash surrender value at that time. (endnote 5)

More recently, section 84.1 has been amended to provide an exception to its application on the sale of shares to a purchaser corporation controlled by children of the business owner. (endnote 6) To qualify for the exception, at the time of disposition the “subject shares” must be QSBC shares as defined in subsection 110.6(1).

The Act was also recently amended to provide a special capital gains exemption on the sale of a qualifying business to an employee ownership trust (the “EOT capital gains deduction”). To qualify for the EOT capital gains deduction the conditions in section 110.61 must be met. Subsection 110.61(1) requires that at the time of disposition of the shares of a corporation (referred to as the “subject corporation”) the conditions in the definition of “qualifying business transfer” (endnote 7) must be satisfied. A qualifying business transfer is a disposition by a taxpayer of shares of the capital stock of the subject corporation to a trust (or a CCPC that is controlled and wholly owned by a trust), and immediately before the disposition, all or substantially all of the FMV of the assets of the subject corporation is attributable to assets that are used principally in the active business carried on by the subject corporation (or a corporation that is controlled and wholly-owned by the subject corporation).

In addition, there is proposed legislation (section 110.63) that would create the Canadian Entrepreneur Incentive (CEI). (endnote 8) Draft subsection 110.63(1) defines “qualifying Canadian entrepreneur incentive property” to mean property that, at the time of disposition, is a share that would be a QSBC share. (endnote 9)

Question

1. Can the CRA confirm that the deeming rule in subparagraph 110.6(15)(a)(i) also applies in determining whether shares qualify as QSBC shares for purposes of the exception in paragraph 84.1(2)(e) and the proposed CEI?

2. Can the CRA also confirm that it would be reasonable for taxpayers to use the cash surrender value of a life insurance policy owned by a “subject corporation” in determining whether the subject shares satisfy the condition set out in paragraph (a) of the definition of “qualifying business transfer” in subsection 248(1) for purposes of the EOT capital gains deduction?

CRA Response

1. The deeming rule in subparagraph 110.6(15)(a)(i) applies for the purposes of the definition “QSBC share” a “share of the capital stock of a family farm or fishing corporation” in subsections 110.6(1) and 70(10), and the definition “small business corporation” in subsection 248(1). Subsections 84.1(2.31) and (2.32) define the circumstances under which the deeming rule in paragraph 84.1(2)(e) applies. Each of subsections 84.1(2.31) and (2.32) require the subject shares to be “QSBC shares,” or “shares of the capital stock of a family farm or fishing corporation” (as those terms are defined in subsection 110.6(1)). Given that subparagraph 110.6(15)(a)(i) applies for the purposes of the definition “QSBC share” in subsection 110.6(1), it also applies for purposes of subsections 84.1(2.31) and (2.32).

The proposed definition “qualifying Canadian entrepreneur incentive property” of an individual (other than a trust) includes property that is a share that would be a QSBC share, as defined in subsection 110.6(1) (determined as if the definition “small business corporation” were read with some modifications). Given that subparagraph 110.6(15)(a)(i) applies for the purposes of the definition “QSBC share” as defined in subsection 110.6(1), the definition of QSBC share in subsection 110.6(1), as modified, applies for purposes of the definition qualifying Canadian entrepreneur incentive property.

2. For the purposes of the capital gains deduction in respect of a gain realized by an individual on a direct or indirect disposition of shares of a subject corporation to an employee ownership trust, as described in subsection 110.61(1), such disposition must be a “qualifying business transfer”, as defined in subsection 248(1). A qualifying business transfer involves the disposition by a taxpayer of shares of the capital stock of a subject corporation to a trust or to a CCPC under specified conditions. In particular, paragraph (a) of the definition “qualifying business transfer” states that:

(a) immediately before the disposition, all or substantially all the fair market value of the assets of the subject corporation is attributable to assets (other than an interest in a partnership) that are used principally in an active business (referred to in this definition as the "business") carried on by the subject corporation or a corporation that is controlled and wholly-owned by the subject corporation,

As noted in our response to Question 1, the deeming rule in subparagraph 110.6(15)(a)(i) applies for the purposes of the definition “QSBC share”, the definition of a “share of the capital stock of a family farm or fishing corporation” in subsections 110.6(1) and 70(10), and the definition “small business corporation” in subsection 248(1). A qualifying business transfer, as defined, refers to a disposition of shares of the capital stock of a subject corporation that meets, among other things, the requirements described in paragraph (a), referred to above. The definitions “QSBC share”, “share of the capital stock of a family farm or fishing corporation” and “small business corporation” are not relevant to the determination of whether a disposition of a share of the subject corporation is a qualifying business transfer. Thus, the deeming rule in subparagraph 110.6(15)(a)(i) does not apply.

In the absence of a specific provision that deems a corporate-owned life insurance policy to be valued in a specific manner, the policy would be valued in accordance with normal valuation practices taking into consideration all relevant facts and circumstances. For more information on the valuation of corporate-owned life insurance, see paragraphs 40 and 41 of Information Circular 89-3, Policy Statement on Business Equity Valuations.

Ryan McPherson
2025-106793
September 18, 2025

ENDNOTES

1 Unless otherwise stated, all references to a statute are to the relevant provision of the Income Tax Act R.S.C. 1985 (5th Supp.), c.1, as amended, (the Act), or, where appropriate, the Income Tax Regulations, C.R.C., c.945, as amended, (the Regulations)

2 Subsection 110.6(2.1).

3 The CRA has indicated this requirement means 90% of more of the corporation’s assets.

4 As defined in subsection 148(9)

5 In The CRA TI 9310105 dated May 23, 1993, the CRA has indicated that a life insurance policy is not considered to be an active business asset.

6 Paragraph 84.1(2)(e) and subsection 84.1(2.3),(2.32) and (2.32).

7 Defined in subsection 248(1). The EOT capital gains exemption is currently effective for dispositions taking place in 2024-2026.

8 The Department of Finance has indicated that the CEI legislation will be enacted as soon as practical and will be effective commencing in 2025.

9 However, the CEI would not be available on the disposition of shares in “excluded businesses” as defined in subsection 110.63(1).