22 May 1993 Income Tax Severed Letter 9310115 - Life Insurance Policy—Shareholder

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.

                                  DRAFT

              THE CONFERENCE FOR ADVANCED LIFE UNDERWRITING

                         1993 Annual Conference

Question 13

Assume that a corporation is the owner and beneficiary of life insurance policies on the lives of its shareholders. The proceeds from the policies are to be used either to redeem shares held by a deceased shareholder, or to fund a purchase of those shares by the surviving shareholders. Revenue Canada has stated in the past that, on the sale of shares by an estate to a purchaser with whom it does not deal at arm's length, an adjustment might occur under section 69 of the Act to take into account the life insurance proceeds payable to the corporation on the deceased's death. In that context, please consider the following:

          (a)
          Where the corporation is required under a
          shareholders agreement to pay the life insurance
          proceeds as a capital dividend, either to the
          estate of the deceased or to the surviving
          shareholders, would the Department agree that, in
          valuing the shares sold by the estate, the fair
          market value of the life insurance proceeds is
          offset by a liability, i.e. the requirement to
          distribute the proceeds under the terms of the
          agreement?

          (b)
          Assuming the various tests in subsection 110.6(15)
          are met, after the life insured's death the policy
          on his or her life would have a value equal to its
          cash surrender value immediately before the death. 
          This value is relevant, however, only for the
          purposes of the capital gains exemption rules.  For
          the purposes of calculating the amount of any
          capital gain which the estate might realize on the
          sale of its shares, however, would the Department
          nevertheless include all of the life insurance
          proceeds for the purposes of any adjustment under
          section 69 of the Act?

Response

          (a)  Where the parties do not deal at arm's length,
          the Department will take into consideration all of
          the life insurance proceeds in valuing the shares
          held by the estate and may increase the purchase
          price for the shares pursuant to section 69 of the
          Act.  In this respect, the fact that there is a
          requirement to pay dividends is not considered in
          the valuation of the shares to be sold by the
          estate. See the comments in Information Circular

89-3, paragraphs 28 to 31 and Interpretation
          Bulletin 
IT-140R3
.

          (b)  The rule in subsection 110.6(15) is intended
          to ensure that the capital gains exemption is
          available in the circumstances contemplated by that
          subsection. It has no effect on determining the
          amount of a gain. 

Glen Thornley 931011 April 22, 1993