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:
Whether the statement in paragraph 6 of IT-430R3 that receipt, by a creditor, of the net proceeds of a life insurance policy that has been assigned by a private corporation that is a debtor to a creditor as security for indebtedness increases the capital dividend account of the creditor corporation is accurate.
Position TAKEN:
No.
Reasons FOR POSITION TAKEN:
The receipt by a creditor of proceeds of a life insurance policy that has been collaterally assigned as security for indebtedness is, in accordance with the doctrine of constructive receipt, considered received by the debtor corporation as policyholder and beneficiary and then directed to the creditor in accordance with the assignment arrangement. Such proceeds would continue to increase the capital dividend account of the debtor corporation irrespective of where the payment is directed.
It is recommended that a correction sheet be issued to IT-430R3.
970718
XXXXXXXXXX G. Donell
Attention: XXXXXXXXXX
April 8, 1997
Re: IT-430R3 - Collateral & Creditor Insurance
This is in reply to your letter of March 13, 1997 concerning recently issued Interpretation Bulletin, IT-430R3, "Life insurance proceeds received by a private corporation or a partnership as a consequence of death", dated February 10, 1997.
As you pointed out paragraph 6 of IT-430R3 represents a change in interpretation from that of former paragraph 6 of IT-430R2. The relevant part of paragraph 6 of IT-430R2 read as follows:
6.
A life insurance policy may be used to secure the indebtedness of a private corporation or a partnership with part or all of the proceeds arising upon the death of the person whose life was insured being paid directly to the creditor as beneficiary or as an assignee for security. In such cases the debtor corporation paying the related premiums is entitled to any benefit described in 1 above and the partners of the debtor partnership paying the related premiums are entitled to any benefit described in 3 above.
Paragraph 6 of IT-430R3 reads as follows:
6.
A life insurance policy may be used to secure the indebtedness of a private corporation or a partnership with part or all of the proceeds arising upon the death of the person whose life was insured being paid directly to the creditor as beneficiary or as an assignee for security. In such cases, whether or not the premium cost is borne directly or indirectly by the debtor, the entitlement to the addition to the capital dividend account (or the entitlement of its partners to an addition to the adjusted cost base of each of their partnership interests) remains with that creditor (or its partners).
Justification for the change to paragraph 6 of IT-430R3 is contained in the "explanation of changes" which reads as follows:
|6 (replaces former |6) has been changed to indicate that a debtor corporation cannot add to its capital dividend account the proceeds of a life insurance policy when the proceeds are received directly by the lender as beneficiary even if the debtor corporation pays the premiums. This is because the debtor corporation does not actually receive, as beneficiary, the life insurance proceeds as required by paragraph (d) of the definition of "capital dividend account" in subsection 89(1). This change is effective for proceeds of a life insurance policy received on or after the date of this bulletin.
These bulletins address two situations. The first, which is often utilized in creditor insurance arrangements, is one in which the creditor is the beneficiary and quite often the policyholder, but the premium costs are borne by the debtor either directly or indirectly. The second is one in which the debtor as policyholder and beneficiary of a life insurance policy assigns the policy to the creditor as security against indebtedness.
In regards to the first situation it is our view that the debtor corporation is not entitled to an addition to its capital dividend account for life insurance proceeds where the lender is the beneficiary of the life insurance policy because the debtor does not receive, constructively or otherwise, the life insurance proceeds as required by paragraph 89(1)(b)(iv) of the definition of "capital dividend account". In such a case a creditor that is a private corporation would be entitled to the addition. This bulletin change was precipitated by a concern that the interpretation of former IT-430R2 could have resulted in both creditor and debtor private corporations effectively doubling up on the addition to the capital dividend account.
It was unintended however to extend this interpretation to collateral assignments of life insurance policies for the purpose of securing indebtedness. Although the lender may directly receive the proceeds of a life insurance policy in accordance with assignment rights it is our view that, as beneficiary, the debtor corporation is in constructive receipt of such proceeds, accordingly the debtor corporation will be the only taxpayer entitled to the addition to the capital dividend account. This will not be the case however where there is an absolute assignment of an insurance policy, a determination of which is a question of fact.
We thank you for bringing this matter to our attention and can assure you that a correction sheet will be issued shortly to reinstate the department's position with respect to collateral assignments of life insurance policies. In addition we are currently giving consideration to providing for some grandfathering for insurance arrangements entered into before the issue date of IT-430R3 (February 10, 1997) in respect of which the creditor is the beneficiary of an insurance policy intended to secure the indebtedness of a debtor.
for Director
Financial Industries Division
Rulings Directorate
Legislative and Intergovernmental
Affairs Branch
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