3 May 2011 Roundtable, 2011-0401431C6 - ICAA Roundtable Q.7 CDA and 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.

Principal Issues: Whether the CRA has accepted the decision in The Queen v. Innovative Installation Inc (2010 FCA 285)

Position: Yes, with limited application

Institute of Chartered Accountants of Alberta Roundtable – May 2011

Question 7 - Capital Dividend Account - Life Insurance

Question

Does the CRA accept the decision of the Federal Court of Appeal (FCA) in the case of Her Majesty the Queen v. Innovative Installation Inc. (2010 FCA 285) that life insurance proceeds paid directly to a creditor of a corporation, and used to discharge a debt of that corporation, are received by the corporation for purposes of the determination of that corporation’s capital dividend account (CDA)?

Assuming the CRA does accept this decision, would the CRA also confirm that any such amount previously excluded in computing a corporation’s CDA is now appropriately applied to increase the CDA balance, as the balance is computed based on all transactions since incorporation?

CRA Response

The Innovative Installation case involved a group creditor insurance policy issued to the corporation’s bank. The corporation obtained key person insurance to provide financial security. The bank was the beneficiary under the policy and the corporation paid the premiums on the policy. On the death of the life insured, the bank applied the life insurance proceeds against the corporation’s loan as it was contractually obligated to do. The corporation added the life insurance proceeds to its CDA and the Minister reassessed on the basis that the corporation was not the named beneficiary of the policy and therefore did not receive the proceeds in consequence of the death of the life insured.

The Tax Court found that the corporation benefited from the insurance proceeds by having its loan paid off and that it “received” the proceeds within the definition of CDA in subsection 89(1), despite the funds not passing directly through its hands. Accordingly, the corporation was entitled to add the proceeds to its CDA.

The FCA denied the appeal by the Minister. The FCA held that since the bank was obligated to pay the proceeds to the corporation’s benefit by discharging the loans, the corporation received the proceeds.

In light of the FCA decision in Innovative Installation, it is now the CRA’s position that, to the extent that the other conditions in the CDA definition in subsection 89(1) are met, a corporation may increase its CDA balance by the life insurance component if it is able to demonstrate that the proceeds of a life insurance policy were paid directly to a financial institution and the institution reduced the debt of the corporation under contract between the corporation and the institution. The application of this position is effective as of October 27, 2010 (the date of the FCA’s decision) and is limited to fact situations that are similar or identical to the Innovative Installation decision. The CRA will not retroactively adjust the CDA of a corporation for a prior year, nor reverse a taxable dividend that was previously assessed under subsection 184(3). Rather, the CDA balance will be adjusted so that the prior year insurance amount would increase the balance in the CDA on or after October 27, 2010.

The CRA’s position with respect to life insurance policies as outlined in paragraph 6 of IT-430R3 will be revised accordingly.