26 July 2011 External T.I. 2010-0390171E5 - Liability 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 liability insurance premiums paid by a corporation for an employee, a director, a shareholder or shareholder's family members would constitute a taxable benefit for income tax purposes.

Position: Question of fact. This would depend on the terms of the particular policy under which the premiums were paid and in particular, whether the corporation took out the insurance for the benefit of a director or officer against any liability incurred by him or her in his or her capacity as a director or officer of the corporation as provided in the Business Corporations Act or similar provisions of a provincial law.

Reasons: In line with earlier technical interpretations on this matter.

XXXXXXXXXX 					2010-039017
						Bing Zhang
						(613) 957-2095
July 26, 2011

Dear Sir:

Re: Liability Insurance

This is in reply to your letter of December 14, 2010 wherein you requested our opinion on the application of the Income Tax Act in a given fact situation involving the purchase of a liability insurance by a Canadian controlled private corporation ("the Corporation"). Please accept my apology for the delay in replying.

In the situation that you described, three related individuals held all of the issued and outstanding shares of the Corporation. You mentioned that one of the shareholders was an employee of the Corporation, another one was a director of the Corporation and the last one was neither. You have asked us to comment on the tax consequences of the liability insurance premiums paid by the corporation and the eventual insurance proceeds where the liability insurance would be purchased for the Corporation, the shareholders or and their respective family members, as the case may be.

All statutory references in this letter are references to the provisions of the Income Tax Act, R.S.C. 1985 (5th supp.) c. 1, as amended (the "Act").

Our Comments

Written confirmation of the tax implications inherent in a particular transaction is given by this Directorate only where the transactions are proposed and are the subject matter of an advance income tax ruling request submitted in the manner set out in Information Circular 70-6R5, Advance Income Tax Rulings, dated May 17, 2002. The particular situation outlined in your letter relates to a factual one, involving a specific taxpayer, therefore, you should submit all relevant facts and documentation to the appropriate Tax Services Office for their views. However, we are prepared to offer the following general comments that may be of assistance.

It is a question of fact as to whether a liability insurance premium paid by a corporation for an employee or a shareholder would constitute a taxable benefit. This would depend on the terms of the particular policy under which the premiums were paid and in particular, whether the corporation took out the insurance for the benefit of a director or officer against any liability incurred by him or her in his or her capacity as a director or officer of the corporation as provided in the Business Corporations Act or similar provisions of a provincial law. An accurate determination can only be made after a complete review of all the facts, circumstances and relevant documents in a given situation.

Where the liability insurance premium paid by a corporation constituted a benefit conferred by virtue of a person's employment, the value of the benefit would be taxable pursuant to paragraph 6(1)(a) and the premium would generally be deductible by the corporation pursuant to section 9 provided the amount was otherwise deductible and reasonable under the circumstances. Where it constituted a benefit conferred by virtue of a person's shareholdings, the value of the benefit would have to be included in the shareholder's income under subsection 15(1) and would not be deductible for tax purposes because of paragraph 18(1)(a). Any premiums paid by the Corporation on behalf of a shareholder's family member would also be a benefit to be included in the shareholder's income under subsection 15(1) and would not be deductible for tax purposes because of paragraph 18(1)(a).

The determination of whether a benefit is received by an employee-shareholder in his or her capacity as an employee or as a shareholder involves a finding of fact. There is a general presumption that an employee-shareholder receives a benefit by virtue of his or her shareholdings in those situations where the shareholder, or shareholders, can significantly influence business policy, except where the individual is able to establish otherwise. Exceptions to this presumption would be a situation where the benefit is available to all employees of the corporation under the same or similar circumstances, or a situation where the benefit is comparable in nature and quantum to benefits generally offered to employees who perform similar services and have similar responsibilities for other employers of a similar size.

We trust that these comments will be of assistance.

Yours truly,

Guy Goulet CA, M.Fisc.
Manager
for Director
Ontario Corporate Tax Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch