20 May 2011 Roundtable, 2011-0398401C6 - Grandfathering rule 112(3)

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 grandfathering rule would apply in the situation described?

Position: Yes

Reasons: See below.

CLHIA Roundtable 2011

Question 5

Beneficiary/Ownership Changes

This question relates to the CRA's position announced in 2009 regarding shareholder benefits arising from corporate-owned life insurance policies (footnote 1) and question 3 ("Question 3") of the CRA Round Table at the 2010 annual meeting of the Conference for Advanced Life Underwriting (Income Tax Rulings Directorate document 2010-0359431C6).

In Question 3, the CRA was asked:

Can the CRA please confirm that where a policy was acquired for the purpose described in paragraph 131(11)(b) of S.C. 1998, c.19, that a change in ownership of the policy from Subco to Parentco or a change in beneficiary designation from Parentco to Subco, due to the CRA's new assessing practice, will not result in the loss of grandfathered status for the purposes of subsections 112(3) to (3.32)?

The CRA answered:

Grandfathering for the purposes of the stop-loss rules is fact dependent and will be determined on a case-by-case basis. Accordingly, whether or not the conditions of paragraph 131(11)(b) of S.C. 1998, c.19 would continue to be met in the situations described above may only be determined after a review of all relevant circumstances.

Referring to the fact situation in Question 3, it is our view that, if the shares of Parentco are otherwise grandfathered from the stop-loss rules due to paragraph 131(11)(b) of S.C.1998, c. 19, such status will not be affected by a change in the ownership of the life insurance policy from Subco to Parentco or a change in beneficiary designation from Parentco to Subco. We refer you to the Department of Finance 1997 Technical Notes regarding grandfathering, which state that:

The shares need not be acquired with the proceeds of the life insurance policy that was in place on April 26, 1995. Therefore, policies may be renewed, converted, replaced or entered into after April 26, 1995 without necessarily eliminating the application of the grandfathering rules.

Question:

Can the CRA confirm that our understanding is correct?

If not, what other factors would the CRA consider in determining whether the shares continue to be grandfathered?

CRA Response

It appears that the factual situation you refer to in your question would be as follows: An individual shareholder ("Mr.A") holds shares of the capital stock of a corporation ("Parentco"). Another corporation ("Subco") is a wholly-owned subsidiary of Parentco. Subco is the holder of a life insurance policy on the life of Mr.A and pays the premiums relating thereto. The beneficiary of the life insurance policy is Parentco. Moreover, we understand that the shares of Parentco held by Mr.A would be grandfathered for the purposes of subsection 112(3) of the ITA, pursuant to paragraph 131(11)(b) of the Income Tax Amendments Act, S.C. 1998, c.19, as amended by S.C. 2001, c.17, subsection 251(1) ("Grandfathering Rule"), in the event of a disposition of the Parentco shares that would be made in one of the circumstances described in clauses 131(11)(b)(iv)(A) to (D) of the Grandfathering Rule.

In our view, a change in the ownership of the life insurance policy from Subco to Parentco or a change in beneficiary designation from Parentco to Subco in the situation described in the preceding paragraph, would not, in and by itself, eliminate the application of the Grandfathering Rule for the purposes of the application of subsection 112(3) of the ITA.

Robert Gagnon
(613) 957-9768
May 20, 2011
2011-039840

FOOTNOTES

Note to reader: Because of our system requirements, the footnotes contained in the original document are shown below instead:

1 Question 3 of the CRA Round Table at the 2009 Canadian Tax Foundation Annual Conference and question 25 of the Round Table on Taxation of Fiscal Strategies and Instruments at the 2009 Association de planification fiscale et financière (APFF) Annual Conference.