13 February 1997 External T.I. 9702225 - LIFE INSURANCE PROCEEDS - 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.

Principal Issues:

Where a corporation's debt is covered by group creditor insurance through the financial institution and the cost of the life insurance is factored into the financing of the debt, at the death of the life insured, can the death proceeds payable to the financial institution be added to the corporation's capital dividend account?

Position:

No.

Reasons:

The debtor corporation does not receive the life insurance proceeds, as required by paragraph (d) of the definition of "capital dividend account" in subsection 89(1). This is a change to the Department's position as stated in IT-430R2 and is reflected in IT-430R3.

XXXXXXXXXX 5-970222

Attention: XXXXXXXXXX

February 13, 1997

Dear Sirs:

Re: Life Insurance Proceeds - Capital Dividend Account ("CDA")

This is in reply to your letter of January 21, 1997 in which you asked for clarification on whether proceeds payable to a financial institution pursuant to a group creditor life insurance policy are eligible to be added to the debtor corporation's CDA when the debtor corporation indirectly paid for the cost of the life insurance. You referred to the Department's position in paragraph 6 of IT-430R2 that if the debtor is paying the premiums on the policy, even if indirectly, then the debtor will be entitled to add the life insurance proceeds to its CDA, even in the case where the proceeds went directly to the lender who was the policyholder and beneficiary under the policy.

Pursuant to paragraph (d) of the definition of "capital dividend account" in subsection 89(1) of the Income Tax Act (the "Act"), proceeds of a life insurance policy in excess of the adjusted cost basis of the policy are included in the CDA of a private corporation if:

?the corporation was a beneficiary of the policy before June 29, 1982 and it received the proceeds after 1971 in consequence of the death of any person; or

?the corporation became a beneficiary of the policy after June 28, 1982 and it received the proceeds after May 23, 1985 in consequence of the death of any person.

We would advise that the Department has reconsidered its position as stated in paragraph 6 of IT-430R2. It is now our view that where the proceeds are paid directly to the lender as beneficiary or as an assignee, the debtor will not be entitled to an inclusion in its CDA in respect of such amount. Accordingly, in the circumstances described in your letter, the debtor corporation would not be entitled to an inclusion in its CDA in respect of the life insurance proceeds received by the financial institution.

We note that our revised position is reflected in paragraph 6 of IT-430R3 dated February 10, 1997, a copy of which is enclosed for your information. As indicated in the Explanation of Changes to IT-430R3, the revised position is effective for proceeds of a life insurance policy received on or after February 10, 1997.

We trust that this clarifies our position in this matter.

Yours truly,

Chief
Financial Institutions Section
Financial Industries Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch