8 September 1999 External T.I. 9906865 - LIFE INSURANCE- ACTIVE BUSINESS ASSET?

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:

Is a life insurance policy on the life of a shareholder of Opco an asset used in an active business for the purposes of the SBC definition where the policy is pledged as security for a bank loan the proceeds of which are used in the active business?

Position: No.

Reasons:

For the purposes of determining if a corporation is an SBC, subsection 11O.6(15)(f) provides that a policy on the life of a shareholder is to be valued at its cash surrender value. In our view this amount represents an investment, as opposed to a business, asset

xxxxxxxxxx					990686
D. A. Palamar
(613) 957-2127
Attention:	xxxxxxxxxx

September 8, 1999

Dear Sirs:

Re: Whole Life Insurance Policy - Small Business Corporation

This is in reply to your letter wherein you requested our views regarding the characterization of a life insurance policy. The relevant facts are set out below.

Facts

Mr. A and Mrs A each own half the shares of Opco, a Canadian-controlled private corporation within the meaning given to that term in the Income Tax Act (the "Act"). Opco carries on an active business in Canada in which Mr. A takes an active role. Opco owns a whole life insurance policy on the life of Mr. A which is pledged to a bank as collateral for an operating loan that is used to finance Opco's business. In the event of Mr. A's death the insurance proceeds will be used to pay off the bank debt and any excess will be paid to Opco.

Issue

You have requested our opinion as to whether the life insurance policy would be considered to be used principally in an active business carried on by Opco for the purpose of determining whether Opco would be a "small business corporation" within the meaning of subsection 248(1) of the Act.

Our View

In our view, in the circumstances described, the life insurance policy would not be considered to be used in an active business carried on by Opco. We would also note that in valuing the policy reference should be had to paragraph 11O.6(15)(a) of the Act which has the effect of deeming the fair market value of the policy, at any time prior to the death of the insured, to be its cash surrender value

These comments are a general statement of our opinion and are not binding on Revenue Canada.

Yours truly,

for Director
Reorganization and International Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch