1993 External T.I. 9310120 F - CALU Ques. 14, QSBC Shares Proceeds

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.

THE CONFERENCE FOR ADVANCED LIFE UNDERWRITING

1993 Annual Conference

Question 14

Under paragraph 110.6(15)(b) of the Act, for purposes of the definition of a "qualified small business corporation share", the value of the proceeds or right to receive the proceeds of a corporate-owned life insurance policy after the death of the insured will be deemed not to exceed the cash surrender value of the policy where the proceeds are used within a prescribed time period to redeem, acquire or cancel shares owned by the insured immediately before his or her death. Consider a situation where:

1.     the insured owns 100% of a holding company ("Holdco");

2.     Holdco owns 100% of the preferred shares in an operating company ("Opco");

3.     the insured's children own 100% of the common shares of Opco;

4.     Opco is the owner and beneficiary of an insurance policy on the life of the insured; and

5.     as a result of the death of the insured, Opco receives life insurance proceeds which, in the absence of paragraph 110.6(15)(b), would represent more than 50% of the fair market value of Opco.

Will the common shares held by the children be qualified small business corporation shares if the life insurance proceeds are used by Opco to redeem the preferred shares owned by Holdco shortly after receipt thereof by Opco? Holdco will continue as an investment vehicle for the estate of the insured.

Response

In answering this question we will assume that Holdco is a corporation with which Opco is connected within the meaning of subsection 186(4) of the Act.

The proceeds of a life insurance policy received (or receivable) by a corporation are assets of the corporation, the fair market value of which, subject to paragraph 110.6(15)(b), must be taken into account in determining whether the asset test in the definition of a qualified small business corporation share is met. Life insurance proceeds would not normally be considered to be active business assets where they are to be distributed by the corporation to fund a redemption of shares or used to fund a buy-sell agreement. For purposes of paragraph (c) of the definition of a qualified small business corporation share in subsection 110.6(1), the corporation must meet the test therein with respect to the fair market value of the shares throughout the relevant part of the 24 months preceding the determination time.

In the situation set out above, the life insurance proceeds will not be used to redeem, acquire or cancel the preferred shares owned by the insured in Holdco. Therefore, the condition set out in paragraph 110.6(15)(b) - namely, that the life insurance proceeds be used to redeem, acquire or cancel the shares owned by the insured - would not be met and, consequently, that paragraph would not apply to treat the fair market value of the life insurance proceeds as not exceeding the cash surrender value of the policy immediately prior to the death of the insured. As the life insurance proceeds are otherwise stated to represent more than 50% of the fair market value of Opco's assets prior to the redemption of the preferred shares owned by Holdco, the asset test in paragraph (c) of the definition of a qualified small business corporation share would not be met. As a result, if the children were to dispose of the common shares of Opco within 24 months after the date on which the preferred shares of Holdco are redeemed using the life insurance proceeds, the shares would not be qualified small business corporation shares at such determination time.