4 May 2010 Roundtable, 2010-0359431C6 - Grandfathering provisions - stop-loss rules

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 a change in ownership of a life insurance policy or a change in beneficiary designation due to the CRA's new assessing practice related to corporate-owned life insurance announced in 2009 would result in the loss of grandfathered status for the purposes of subsections 112(3) to (3.32)?

Position: None.

Reasons: Grandfathering for the purposes of the stop-loss rules is fact dependent and will be determined on a case-by-case basis. Subsection 245(2) could apply where the change would result in one corporation being the beneficiary of the policy without also being the policyholder of the policy.

CALU - Conference for Advanced Life Underwriting (2010)

Question 3

Corporate-owned life insurance and the stop-loss rules

This question relates to the 2009 CRA announcement related to a change in its assessing practices related to corporate-owned life insurance (see Question 2 for further background). The issue being addressed in this question relates to the impact, if any, on the change in CRA assessing practice to grandfathered life insurance policies acquired to fund stock redemption agreements entered into before April 27, 1995.

The stop-loss rules in subsections 112(3) to (3.32) generally apply to share dispositions that occur after April 26, 1995. Pursuant to subsection 131(1) of S.C. 1998, c.19, they do not apply, however, to share dispositions taking place after that date where:

1. The shares are owned by a taxpayer on April 26, 1995 and are disposed of pursuant to an agreement in writing made before April 27, 1995.

2. A corporation or a partnership of which a corporation was a member was a beneficiary of a life insurance policy on the life of a taxpayer on April 26, 1995, and the proceeds of the policy were intended primarily to be used to redeem the shares owned by the taxpayer on April 26, 1995. This rule has the following important features:

a) The shares owned by the taxpayer on April 26, 1995 need not be shares of the corporation which is the beneficiary of the life insurance policy; it is necessary only to demonstrate that the proceeds of the policy were intended to be used to acquire the taxpayer's shares. For example, the taxpayer may hold an interest in the corporate beneficiary through one or more holding corporations.

b) 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 these grandfathering rules.

c) The life insurance policy may insure the life of the taxpayer or the taxpayer's spouse or both lives. This is intended to accommodate joint life insurance policies and other estate planning arrangements.

3. Similar rules apply where the taxpayer is a spouse trust and the life insured is the beneficiary spouse.

Questions:

a) Can the CRA please confirm that where a policy was acquired for the purpose described in paragraph 131(1)(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)?

b) Can the CRA also confirm that if a policy that qualifies for grandfathering in 2010 is renewed, converted or replaced that the grandfathering will apply to the new policy?

CRA's Response

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(1)(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.

However, where a change in ownership of the policy, or a change in beneficiary designation, even in circumstances similar to the ones described above, would result in one corporation being the beneficiary of the policy without also being the policyholder of the policy, the result would, in our view, be contrary to the intent of paragraph (d) of the definition of "capital dividend account" in subsection 89(1) of the Act which is that the amount of the proceeds of a life insurance policy to be included in the capital dividend account be reduced by the adjusted cost basis, within the meaning assigned by subsection 148(9) of the Act, of the policy. Accordingly, as we have previously stated, there may be a reasonable argument for applying subsection 245(2) of the Act to reduce the amount to be included by the beneficiary corporation in its capital dividend account in respect of the life insurance policy by the adjusted cost basis of the policy.

Mélanie Beaulieu
2010-035943
(613) 957-9226
May 4, 2010