15 February 1994 Ruling 9402353 - LIFE INSURANCE - CAPITAL DIVIDEND ACCOUNT

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.

RULINGS DIRECTORATE
CORRESPONDENCE SUMMARY

DOCUMENT TYPE:

Opinion

Principal Issues:

Ruling request on a proposal to distribute life insurance proceeds by way of a capital dividend where the shareholders were not shareholders at the time the corporation received the insurance proceeds.

Position TAKEN:

1.Cannot rule.

2.Opinion provided that there is no requirement that a capital dividend can only be paid to those who were shareholders at the time insurance proceeds were received.

Reasons FOR POSITION TAKEN:

1.Primary transactions already completed (and payment of a dividend is not sufficient basis for a ruling) and we do not rule on calculations of tax accounts such as the CDA.

2.In accordance with 89(1)(b) and 83(2). Also, the 83(2.1) anti-avoidance rule provides an exception in the case of distributions of life insurance proceeds in 83(2.3).

LEGAL:

N/A

FINANCE OPINION:

N/A

JURISPRUDENCE:

N/A

RCT PUBLICATIONS:

IC 70-6R2, IT-66R6, IT-430R2

HAA NUMBER: 7313-3

		940235
XXXXXXXXXX	B.G. Dodd

Attention: XXXXXXXXXX

February 15, 1994

Dear Sirs:

Re: Request for an Advance Income Tax Ruling
XXXXXXXXXX

This is in reply to your letter dated January 25, 1994 in which you request an advance income tax ruling in connection with the capital dividend account of XXXXXXXXXX and certain life insurance proceeds. All references to statute are to the Income Tax Act (the "Act").

As discussed in our February 11, 1994 telephone conversation, we are unable to provide the requested advance ruling because the primary transactions are completed rather than proposed. In addition, the Department does not provide advance rulings with respect to calculations of various tax accounts, including the capital dividend account. These points are discussed in paragraphs 6 and 14(g) respectively of Information Circular 70-R2 on the subject of the advance ruling service, a copy of which is enclosed. We are, however, prepared to provide general comments which, as noted in paragraph 21 of the Circular, are not binding on the Department with respect to any particular factual situation.

The Act defines the capital dividend account (the "CDA") in paragraph 89(1)(b). Clause 89(1)(b)(iv)(B) provides that the CDA of a private corporation includes the proceeds of a life insurance policy received after May 24, 1985 by the corporation as beneficiary under the policy (in consequence of the death of any person) if received after the end of the year in which the corporation last became a private corporation, to the extent such proceeds exceed the adjusted cost basis of the policy.¹

Subsection 83(2) is the provision whereby a private corporation may elect, in prescribed manner and form, to pay its shareholders a dividend out of its CDA ("capital dividend"), which capital dividend is not included in computing the income of the shareholders, if Canadian residents.

There is no requirement in either of paragraph 89(1)(b) and subsection 83(2) that the shareholders to whom the capital dividend is to be paid must have been shareholders of the corporation at the time the life insurance proceeds were received by the corporation.

We would further note that subsection 83(2.1) is an anti-avoidance rule applicable where one of the main purposes for which a shareholder acquired the share on which the dividend was paid was to receive the capital dividend. Where this provision applies, the dividend is a taxable dividend and must be included in income. However, pursuant to subsection 83(2.3), the anti-avoidance rule does not apply to a situation in which it is reasonable to consider that the purpose of paying the dividend is to distribute an amount that was received by the corporation and included in its CDA as proceeds of a life insurance policy pursuant to paragraph 89(1)(b)(iv).

We also confirm our discussion of the fact that the proceeds of a life insurance policy would not be included in a private corporation's CDA where the beneficiary under the policy is the deceased's estate.

While we hope the foregoing, and the enclosed Interpretation Bulletins IT-66R6 and IT-430R2, will be of assistance to you, we reiterate that our comments are general in nature and should not be construed as binding in respect of any particular situation.

Yours truly,

for Director
Financial Industries Division
Rulings Directorate

¹ The terms "life insurance policy", "private corporation", and "adjusted cost basis" have the meanings assigned by paragraphs 138(12)(f), 89(1)(f), and 148(9)(a) respectively.

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