22 April 1993 External T.I. 9310105 F - Business Assets - Capital Gains - 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.

DRAFT

THE CONFERENCE FOR ADVANCED LIFE UNDERWRITING1993 Annual Conference

Question 12

Assume that a Canadian-controlled private corporation owns and is the beneficiary of a life insurance policy on a key employee of the corporation. On the death of that employee the corporation uses the insurance proceeds to recruit, hire and train management personnel and also uses the proceeds to overcome short term financial difficulties occasioned by the death of the life insured. In these circumstances, would the Department agree that the insurance proceeds would constitute active business assets for the purposes of rules contained in section 110.6 of the Act and of the definition of "small business corporation" in subsection 248(1) of the Act? Would the policy constitute an active business asset of the corporation before the employee's death and, if so, would it be valued in accordance with the principles outlined in IC 89-3? Would your answer change if the employee were also a shareholder in the Corporation?

Response

The Department's published position with respect to corporate owned life insurance policies is set out in Interpretation Bulletin IT-416R3 and in Information Circular 89-3. In this respect, the Department has stated on numerous occasions that the fair market value of the life insurance policy on the life of a shareholder as determined in accordance with the comments in paragraphs 4 and 5 of Interpretation Bulletin IT-416R3 will be taken into account to determine whether such corporation is a small business corporation at the time of the death of the insured under the policy. The same policy would extend to a life insurance policy held on the life of a key employee. The insurance policy will be valued in accordance with normal valuation practices, taking into consideration all facts relevant to the particular case. The Department has also stated that the life insurance policy would not normally be considered to be an asset used in an active business carried on by the corporation where the life insurance proceeds are to be distributed by the corporation as a dividend or be used to fund a buy-sell agreement. However, the insurance proceeds would likely constitute an active business asset where those proceeds are used to recruit, hire and train new management personnel and also used to overcome short term financial difficulties occasioned by the death of the key employee. This would be a question of fact in every case.

As the cash surrender value of a corporate owned life insurance policy is a form of long term investment, such a life insurance policy would not qualify as an asset "used in an active business" before the death of the key employee. It would, however, be valued in accordance with the principles outlined in IC 89-3, as it also would be if the employee were a shareholder in the Corporation.