17 May 1993 Income Tax Severed Letter 9310100 - Valuation of Active Business Assets—Capital Gains

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.

        THE CONFERENCE FOR ADVANCED LIFE UNDERWRITING

                   1993 Annual Conference
Question 12

Assume that a Canadian-controlled private corporation is the owner and the beneficiary of a life insurance policy on a key employee of the corporation. On the death of that employee the corporation uses the insurance proceeds to recruit, hire and train management personnel and also uses the proceeds to overcome short term financial difficulties occasioned by the death of the life insured.

    (a)  In these circumstances, would the Department agree
         that the insurance proceeds would  constitute active
         business assets for the purposes of rules in section
         110.6 of the Act and the definition of "small
         business corporation" in subsection 248(1) of the
         Act?

    (b)  Would the policy constitute an active business asset
         of the corporation before the employee's death?

    (c)  If the answer to (b) is yes, would the policy be
         valued in accordance with the principles outlined in
         Information Circular 
89-3?

    (d)  Would your answer change if the employee were also a
         shareholder of the corporation? 

Response

    (a)  Insurance proceeds could constitute an active
         business asset where those proceeds are used to
         recruit, hire and train new management personnel and
         also used to overcome short term financial
         difficulties occasioned by the death of the key
         employee.  This would be a question of fact in every
         case. 

    (b)  Where a policy has a cash surrender value it may not
         qualify as an asset used in an active business as it
         would appear to be a form of investment.  Where a
         term policy is held by a corporation on a key
         employee, in a situation where the policy is
         considered to have value, it would be a question of
         fact whether or not the policy would be considered
         to be an asset used in an active business. 

    (c)  Regardless of the answer in (b), the policy would be
         valued in accordance with the position stated in
         paragraphs 40 and 41 of Information Circular 
89-3.

    (d)  If the key employee was also a shareholder the
         answers in (a) and (b) would not change, however,
         for the purposes of the definition of qualified
         small business corporation share in subsection
         110.6(1) and small business corporation in
         subsection 248(1), the fair market value of the
         policy,  at any time before death would be deemed to
         be its cash surrender value pursuant to paragraph
         110.6(15)(a).

Prepared by G. Thornley