News of Note
CRA treats the deemed proceeds arising on death from a jointly owned whole life policy as being simply a valuation matter
Email this ContentOpco and its sole shareholder (A) jointly acquired a universal life insurance policy on the life of A, whose stipulated death benefit equals $1 million plus the fund value of the policy immediately before A’s death. Under a co-ownership agreement, Opco is entitled to the $1 million face amount on death and bears the annual insurance charges; and A is entitled to make additional (exempt-test qualifying) deposits into the policy, can designate the fund value recipient, and is also entitled to the cash surrender value (“CSV”) on any pre-death termination.
A dies when the fund value (and CSV) of the policy equals $200,000, so that Opco receives $1 million and A’s estate receives $200,000. Is the FMV of the life insurance policy under s. 70(5.3) (generally valuing a life policy for inter alia s. 70 purposes at its CSV) $200,000; and is the FMV of Opco’s interest in the policy nil, as it has no interest in the CSV pursuant to the co-ownership agreement?
CRA responded:
[W]e cannot definitively conclude that the FMV of the interest in the life insurance policy to Opco will be nil. The terms and conditions of the shared ownership arrangement, the specific life insurance contract and all other related agreements which may form part of the particular arrangement and the particular facts at the given time would have to be considered in the determination of the FMV of Opco’s interest in the life insurance policy.
… The CRA does not have its own method for computing the FMV; this computation is based upon the facts known on the valuation date, to which the principles and standards of the Canadian Institute of Chartered Business Valuators are applied.
Neal Armstrong. Summary of 8 July 2020 CALU Roundtable Q. 5, 2020-0842191C6 under s. 70(5.3).
GST/HST Severed Letters June 2020
The morning's release of one severed letter from the HST/HST Rulings Directorate (identified by them as their June 2020 release) is now available for your viewing.
CRA indicates that an interest in a related segregated fund trust could be transferred on a s. 85(1) rollover basis
S. 39(1)(a)(iii) provides that a taxpayer’s capital gain excludes gain from the disposition of an insurance policy, including a life insurance policy, except for “that part of a life insurance policy in respect of which a policyholder is deemed by paragraph 138.1(1)(e) to have an interest in a related segregated fund trust”. CRA considered that on this basis “a disposition of an interest in a related segregated fund trust will generally result in capital gains treatment” so that “the interest may be considered a capital property, and accordingly, an eligible property under paragraph 85(1.1)(a) of the Act for purposes of subsection 85(1).” Accordingly, such an interest could be transferred on a s. 85(1) rollover basis.
Neal Armstrong. Summaries of 8 July 2020 CALU Roundtable Q. 4, 2020-0842171C6 under s. 85(1.1)(a) and s. 138.1(1)(e).
CRA indicates that the two components received under a “face amount plus fund value” universal life policy are included in computing the corporate policy owner’s CDA
CRA indicated that where an exempt universal life held by Opco on the life of its shareholder paid two amounts to Opco on the death of the individual - the fund value of the policy (being the accumulated balance of the investment accounts within the policy at the time of the death of the life insured); and the face amount – the total of those two amounts would be “proceeds of a life insurance policy” for purposes of computing the increase to the capital dividend account of Opco.
Neal Armstrong. Summary of 8 July 2020 CALU Roundtable Q. 3, 2020-0842151C6 under s. 89(1) – capital dividend account – (d)(ii).
CRA comments on the use of notes in hybrid pipelines to fund estate taxes or other liabilities
In 2018-0767431R3, the amount of the pipeline note paid in any single quarter in the first post-amalgamation year was not to exceed 15%, and in 2018-0780201R3, this percentage was 10%. CRA effectively intimated that these specific percentages and other “gradual repayment” particulars were offered up by the pipeline ruling applicant and were not imposed by it.
When asked if it is permissible for the estate to borrow funds from the pipeline corporation in order to pay its liabilities (e.g., for taxes) during the period in which the note is being repaid following the amalgamation of the pipeline corporation, CRA noted that as “an example,” this can occur in a hybrid pipeline transaction in which there is a preliminary redemption of shares of the estate for a note (subject s. 84(3)) with a resulting carryback of a loss under s. 164(6).
Neal Armstrong. Summary of 8 July 2020 CALU Roundtable Q. 6, 2020-0842241C6 under s. 84(2).
CRA confirms that a refund of premiums on death under a life insurance policy does not entail its disposition but can increase the CDA of the corporate owner
A private corporation is the owner and beneficiary of an exempt life insurance policy (with an adjusted cost basis of $90,000) on the life of a shareholder, who dies from, say, suicide or skydiving, which does not void the policy, but instead results in the insurer repaying all premiums ($100,000).
CRA confirmed that there is a CDA addition of $10,000 under para. (d) of the CDA definition respecting the receipt of “proceeds of a life insurance policy... of which the corporation was... a beneficiary" received as a “consequence of the death of any person;" while at the same time, pursuant to para. (j) of s. 148(9) - “disposition,” there is no disposition in relation to an interest in a life insurance policy.
Neal Armstrong. Summary of 8 July 2020 CALU Roundtable Q. 2, 2020-0842141C6 under s. 89(1) – capital dividend account – (d).
Income Tax Severed Letters 19 August 2020
This morning's release of nine severed letters from the Income Tax Rulings Directorate is now available for your viewing.
Gestions Cholette – Tax Court of Canada finds that failure to review a return containing an error that should have been detected was carelessness under s. 152(4)(a)(i)
Due to what Favreau J found to be carelessness of its external accountant, the taxpayer failed to include, in its income, taxable dividends totalling $920,700 received in 2010 from subsidiaries while, at the same time, claiming a s. 112(1) deduction of $920,700 in computing its taxable income, thereby understating its taxable income by that amount.
In finding that CRA had established carelessness or neglect in reassessing beyond the normal reassessment period to add back the dividend amounts, Favreau J stated:
[T]he failure to review the appellant's income tax return and the failure to question the accountant to ensure the accuracy of the information contained in the return demonstrate a lack of due diligence on the part of the appellant's officers. Considering the skills, experience and knowledge of the appellant's officers, I believe that they would have been able to discover the error had they taken the trouble to check the return as would a prudent and conscientious person.
Neal Armstrong. Summary of Gestions Cholette Inc. v. The Queen, 2020 CCI 75 under s. 152(4)(a)(i).
CRA finds that an Australian “Self-managed Super Fund” was a pension plan for Canadian purposes
CRA found that an Australian “Self-managed Super Fund” to which the taxpayer, her husband and her husband’s employer had made contributions before their divorce and her coming to Canada was a pension plan (so that payments under the “SMSF” were required to be included in her income after becoming a Canadian resident) given such employer contributions and that the sole purpose of the SMSF was to provide retirement benefits to its members. The fact that the Australian tax treatment was quite different (i.e., income accumulating in the fund had been subject to flat tax of 15%, or 10% in the case of long-term capital gains, and pension payments after retirement were free of Australian tax) was irrelevant.
CRA also noted that is some circumstances, “paragraph 60(j) allows for a tax-deferred transfer of a pension benefit (that is not part of a series of periodic payments) from an unregistered pension plan to an RRSP.”
Neal Armstrong. Summaries of 24 June 2020 External T.I. 2018-0747781E5 under s. 248(1) – superannuation or pension benefit and s. 60(j).
We have translated 5 more CRA Interpretations
We have published a further 5 translations of CRA interpretations released in April and March, 2010. Their descriptors and links appear below.
These are additions to our set of 1,246 full-text translations of French-language Roundtable items and Technical Interpretations of the Income Tax Rulings Directorate, which covers all of the last 10 1/3 years of releases of Interpretations by the Directorate. These translations are subject to the usual (3 working weeks per month) paywall.