28 June 1993 Income Tax Severed Letter 9307365 - Directors Liability 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.

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.

                                                   930736
XXXXXXXXXX                                         A.W.Larochelle
                                                   (613) 952-1361

Attention: XXXXXXXXXX

June 28, 1993

Dear Sirs:

Re: Taxable Benefits—Directors Liability Insurance

We are replying to your letter of March 8, 1993, and subsequent correspondence with enclosures wherein you pose various questions concerning the income tax implications relating to the purchase of liability insurance for the directors of a corporation. We regret the delay in providing a response.

Before commenting on the matter at hand, and as explained in our telephone conversation, we would again emphasize that are unable to provide comments that would apply specifically to all situations as the facts of each case may be different. It is most important for us to review the pertinent documentation before offering any opinion on the tax consequences of a particular situation.

In a situation involving proposed transactions of named taxpayers, we would suggest that you proceed by way of a request for an advance income tax ruling. The procedure for requesting an advance income tax ruling is fully described in Information Circular 70-6R2 and the special release thereto. If the transctions are complete, full details should be submitted to the District Taxation Office for their consideration.

Notwithstanding the above comments, we are, however, prepared to provide you with the following general comments relating to the subject matter of your enquiry.

Generally speaking, where a corporation purchases liabilty insurance for its directors and officers and the risks covered by the policy are inherent and normal occurrences in the carrying out of the duties of the insured as a director or officer of the corporation, neither the premiums paid in respect of such insurance nor any proceeds which may become receivable under such policy will be considered a taxable benefit to the director or officer. In our view, the assumption by the corporation of a director's or officer's personal liability for corporate actions would not create a taxable benefit for the director provided that such indemnification is limited to that which is permitted under section 124 of the Canada Business Corporation Act, R.S.C. 1985, c. C-44 (CBCA) or similar provisions in a provincial business corporation act.

Insofar as the purchase of insurance for the indemnification of directors and officers (as permitted under subsection 124(4) of the CBCA or similar provincial legislation) is reasonable in the circumstances and can be considered instrumental in attracting and retaining qualified personnel, it is our view that such expenses would be deductible to the respective corporation.

Should an indemnification policy provide a director or officer with additional coverage for other personal liabilities and charges an additional premium for such extra coverage, the additional premium would be included in the director's or employee's income as a taxable benefit. Where a policy indemnifies a director or officer for any personal liability without allocation for those risks which are specifically permitted under the CBCA, it is our view that the entire premium would represent a taxable benefit to the employee.

We trust our comments will be of assistance to you.

Yours truly,

P.D. Fuoco for Director Business and General Division Rulings Directorate Legislative and Intergovernmental Affairs Branch