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Principal Issues: [TaxInterpretations translation] Could the CRA clarify its position on the application of section 9 and paragraph 12(1)(x) in a situation where a life insurance policy is held by a corporate group where the policyholder is a group corporation and the policy beneficiary is another group corporation.
Position: This is a question of fact.
Reasons: The CRA will review these situations in light of the legal nature of the transactions and the facts relevant to the file.
Financial Strategies and Financial Instruments Roundtable-- 2010 APFF Conference
Question 9
Shareholder benefit and life insurance policy held by a corporation
Question 2 at the May 4, 2010 CALU Roundtable related to a shareholder benefit and the holding of a life insurance policy by a corporation. That question followed Question 15, which was asked at the same Roundtable in 2009, and in which the CRA indicated a change of position where an insurance policy is owned and paid for by a subsidiary that designates the parent corporation as beneficiary.
The question included the following three situations:
Situation A
Holdco holds an insurance policy on the life of its shareholder, pays the premium and designates its subsidiary as the beneficiary.
Situation B
The structure is identical to Situation A, but the subsidiary is designated as irrevocable beneficiary and reimburses Holdco for the premiums.
Situation C
The structure differs because there are sister corporations. Corporation 1 and Corporation 2 are both owned by the same shareholder, Mr. A. Corporation 1 holds an insurance policy on Mr. A's life and pays the premiums. As Corporation 2 is designated as beneficiary, it will reimburse Corporation A [sic, 1] for the amount of the premiums paid.
The CRA confirmed that subsection 15(1) would not apply in Situations A and C, but that subsection 246(1) could apply in Situation A, i.e., where Holdco designates its subsidiary as beneficiary.
Subsection 246 (1) can be summarized as follows:
Where … a person (Holdco) confers a benefit, either directly or indirectly, by any means whatever, on a taxpayer (subsidiary), the amount of the benefit shall, to the extent that it is not otherwise included in the taxpayer’s income… and would be included in the taxpayer’s income if the amount of the benefit were a payment made directly … to the taxpayer… , be … included in computing the taxpayer's taxable income …for the taxation year … .
Could the CRA explain the reason why the subsidiary should be taxable on the amount of the premium, since Holdco could just as readily pay an amount equal to the premium, in the form of a loan or capital injection, without any tax implication for the subsidiary?
Respecting Situations B and C, the CRA noted that it would be necessary to have all the documentation relating to those situations in order to determine whether the reimbursement should be included in the income of Holdco (Situation B) or of Corporation 1 (Situation C) pursuant to section 9 or paragraph 12(1)(x). In addition, CRA stated that there would be no taxable benefit by virtue of 15(1) in Situation B for Holdco where the reimbursement is included in its income.
Section 9 provides: "a taxpayer’s income for a taxation year from a business or property is the taxpayer’s profit from that business or property for the year."
In Situation B, Holdco is the owner, pays the premiums, and requests the reimbursement of the premiums by its subsidiary since it is beneficiary of the death benefit. It is difficult to see how Holdco could generate a profit by virtue of that arrangement, except in the event that the subsidiary would pay more than the cost of the policy. However, in that case, should not the profit be taxed by virtue of 15(1)?
As for paragraph 12(1)(x), it is very broad in scope since it provides that payments received from another person who pays the amount in the course of earning income from a business or property, as an inducement, whether as a grant, subsidy, forgivable loan, deduction from tax, allowance or any other form of inducement ... shall be included in … the income of a taxpayer.
In the event that Holdco deducts the premiums on the policy (if the policy was provided as collateral as permitted by paragraph 20(1)(e.2)), this could probably be justified, but in a situation where the premiums cannot be deducted, it would result in double taxation if Holdco were to include in its income the reimbursements of the premiums by its subsidiary.
We understand the CRA's concerns that the result in this type of scenario could increase the capital dividend account since the beneficiary corporation does not hold the policy, nor have any ACB. However, to prevent abuse, the CRA has repeatedly stated that where there are no business reasons, the general anti-avoidance rule could apply.
Since we must advise our clients, could the CRA clarify its position and its reasoning as to the application of section 9 and paragraph 12(1)(x) in Situations B and C?
CRA Response
The application of section 9, paragraph 12(1)(x), subsections 15(1), 245(2) and 246(1) is a question of fact and each situation must be examined individually. In addition, we cannot further develop our positions in the context of a technical interpretation request because we cannot anticipate all the circumstances. However, the CRA will consider any situation that involves a corporate group and where the life insurance proceeds included in a corporation's capital dividend account is not reduced by the adjusted cost base of the policy. This can occur where a corporate group holds the policy and another corporation in the group is beneficiary. The analysis of such a situation will be done in light of the legal nature of the transactions and according to all the facts relevant to the file.
Catherine Ayotte
(613) 957-8962
October 8, 2010
2010-037190
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