23 March 1992 Income Tax Severed Letter 9117175 - Life Insurance and Capital Dividend

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.

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the Department. Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle du ministère.

Subject: LIFE INSURANCE AND CAPITAL DIVIDEND Section(s): 89(1)(b)(iv), 148(9)(a)]

XXX 5-911717 D.J. Powrie (613) 957-2109

Attention: XXX

March 23, 1992

Dear Sirs:

Re: Capital Dividend Account-Paragraph 89(1)(b)

This is in reply to your letter of June 18, 1991 in which you requested our opinion regarding the income tax implications of the receipt of life insurance proceeds by a corporation.

Our views are based on the following assumptions:

• 1. Mr. A owns 100% of the shares of A Co.
• 2. Mr. B owns 100% of the shares of B Co.
• 3. A Co and B Co each own 50% of the shares of Opco.
• 4. Mr. A and Mr. B may or may not deal at arm's length.
• 5. A Co acquires a life insurance policy on A's life and names B Co as the beneficiary of the policy and B Co acquires a life insurance policy on B's life and names A Co as the beneficiary.
• 6. The purpose of the cross insurance structure is to enable the survivor's holding company to purchase the shares of Opco from the deceased's holding company in the event of the death of A or B.
• 7. Mr. A dies and B Co receives proceeds under the insurance policy on A's life.

Our Comments

In our opinion B Co would add the amount of any proceeds of the policy received as a consequence of the death of A less B Co's adjusted cost basis of the policy immediately before A's death to its capital dividend account pursuant to subparagraph 89(1)(b)(iv) of the Income Tax Act (all statutory references in this letter are to provisions of the Act). B Co's adjusted cost basis of the policy would be determined under paragraph 148(9)(a) which, in our view, only creates a cost basis for policyholders. On the facts assumed above B Co would not be a policyholder (which in our view generally means the legal owner of a policy) immediately before A's death, so B Co's adjusted cost basis at that time would be nil.

You also requested our comments as to the potential application of subsection 15(1) to the structure. The question of whether the provision applies is a question which can only be determined based on a review of all the circumstances.

The foregoing comments are given in accordance with the practice referred to in paragraph 21 of Information Circular 70-6R2 dated September 28, 1990 and are not binding on Revenue Canada, Taxation.

Yours truly,

for Director
Reorganizations and Foreign Division
Rulings Directorate
Legislative and Intergovernmental Affairs Branch