20 January 1998 External T.I. 9730575 - VERIFICATION OF LIFE INSURANCE

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 pursuant to subparagraph 110.6(15)(a)(ii) of the Act the fair market value of the proceeds of the insurance policy received by Opco will be deemed not to exceed the cash surrender value (within the meaning assigned by subsection 148(9) of the Act) of the life insurance policy immediately before the death of the individual - the shares of Opco (a QSBC) are owned by Holdco and Opco uses the proceeds of the insurance policy on the life of the deceased to redeem its shares and then Holdco uses the proceeds to redeem its shares owned by the deceased.

Position:

Yes - indirect use is permitted.

Reasons:

The law

XXXXXXXXXX 973057

Attention: XXXXXXXXXX

January 20, 1998

Dear Sirs:

Re: Application of Subparagraph 110.6(15)(a)(ii)

This is in reply to your facsimile letter dated November 19, 1997, concerning certain income tax consequences under the Income Tax Act (the Act) where corporate owned life insurance is used to redeem, acquire or cancel the shares of a corporation owned by the deceased in the following circumstances.

In your letter, you have indicated that an individual (the "insured") owns all the shares of a taxable Canadian corporation ("Holdco") that in turn owns shares of another taxable Canadian corporation ("Opco") representing more than 10% of the votes and value such that Opco is connected to Holdco within the meaning of subsection 186(4) of the Act. The shares of Opco that are owned by Holdco represent Holdco's only asset. Opco owns an insurance policy on the life of the insured wherein Opco is required on the insured's death to redeem, acquire or cancel all of its shares that are held by Holdco. Holdco, is required to use the funds it may receive from Opco to redeem, acquire or cancel all its shares that were owned by the insured immediately before the insured's death (then to be owned by the insured's estate) with 24 months from the insured's death.

Your question is whether pursuant to subparagraph 110.6(15)(a)(ii) of the Act the fair market value of the proceeds of the insurance policy received by Opco will be deemed not to exceed the cash surrender value (within the meaning assigned by subsection 148(9) of the Act) of the life insurance policy immediately before the death of the individual. Specifically, you are concerned that if the Department does not consider the indirect receipt of the life insurance proceeds by Holdco that are used to redeem, acquire or cancel its shares to be acceptable for the purpose of clause 110.6(15)(a)(ii)(B) of the Act, then the shares of Holdco may not qualify as shares of a Qualified Small Business Corporation ("QSBC"), as defined in subsection 110.6(1) of the Act, since Holdco's status as a QSBC is dependent upon Opco being a QSBC.

Our Comments

Subsection 110.6(15) of the Act provides that for the purposes of the definition of "qualified small business corporation share," "share of the capital stock of a family farm corporation," and "small business corporation," the fair market value of the life insurance policy at any time before the death of the insured will be its cash surrender value and after the death and for up to 24 months, the proceeds will be valued at an amount not in excess of the cash surrender value immediately before the insured's death. For these valuation provisions to apply, the individual whose life is insured must own shares of the particular corporation that owns the policy, shares of a connected corporation (within the meaning assigned by subsection 186(4) of the Act on the assumption that the particular corporation referred to above was a payer corporation within the meaning of that subsection) or shares of a corporation connected to a connected corporation. Additionally, the proceeds on death from the insurance policy must be used, directly or indirectly, within 24 months (usually) of the insured's death to redeem, acquire, or cancel the shares owned by the insured immediately before the insured's death.

Provided the proceeds of the insurance policy are used by Opco to acquire, redeem or cancel its shares that are owned by Holdco and Holdco uses these proceeds to acquire, redeem or cancel its shares that are owned by the insured, immediately before the insured's death, within the required time frame, then in our view, the proceeds of the policy would be indirectly used to acquire, redeem or cancel the shares of Holdco. Consequently, the fair market value to Opco of the insurance proceeds or right to receive such proceeds will be deemed not to exceed the cash surrender value of the policy immediately before the death of the insured.

While we trust the foregoing comments are useful they are given in accordance with the practice referred to in paragraph 22 of Information Circular 70-6R3 dated December 30, 1996 and are not binding on the Department in respect of any particular situation.

Yours truly,

F. Lee Workman
Section Chief
Financial Institutions Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch