29 March 2000 External T.I. 2000-0002575 - SHAREHOLDER BENEFIT-CORP. OWNED LIFE INS.

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.

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the Department.

Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle du ministère.

Principal Issues:

1) The tax implications of a term insurance rider of $XXXXXXXXXX , naming the sole shareholder's spouse and daughter as beneficiaries, on a corporate-owned last-to-die life insurance policy insuring the lives of the shareholder and the shareholder's wife, in which the corporation would be the beneficiary.

2) Whether a taxpayer can have two spouses for tax purposes.

3) The tax implications where a corporation assigns its universal life insurance policy as security for a loan to be taken out by the shareholder

Position:

1) It would depend on the actual insurance contract. However, it is likely a taxable shareholder benefit.

2) Yes.

3) Shareholder benefit.

Reasons:

1) Based on the facts.

2) According to the extended meaning of "spouse" in subsection 252(4) of the Act, a spouse of a taxpayer includes a person of the opposite sex who has been cohabiting in a conjugal relationship with the taxpayer for at least 12 months or who is a parent of a child of whom the taxpayer is also a parent. Accordingly, if a taxpayer is not divorced from a spouse to whom he or she was legally married, and the taxpayer is now living with another person, he or she may have two spouses for income tax purposes,

3) Position taken in Question 41 of the 1991 Revenue Canada Round Table.

XXXXXXXXXX 	J. Gibbons
		2000-000257
Attention:  XXXXXXXXXX 

March 29, 2000

Dear XXXXXXXXXX:

We are replying to your letter of January 4, 2000, in which you requested our comments concerning a number of scenarios involving your clients. XXXXXXXXXX.

Written confirmation of the tax implications inherent in particular transactions is given by this Directorate only where the transactions are proposed and are the subject matter of an advance ruling request submitted in the manner set out in Information Circular 70-6R3. However, we have provided some general comments which may helpful to you.

You request our views concerning a corporate-owned last-to-die life insurance policy, on the lives of the corporation's owner (the "shareholder") and the shareholder's wife, in which the corporation would be the beneficiary. The policy would also have a term insurance rider of $XXXXXXXXXX, naming the spouse and the shareholder's daughter as beneficiaries. In particular, you are concerned with the tax consequences to the shareholder if it had such a rider.

In order to determine the income tax treatment of a particular insurance policy, it would be necessary to examine the actual policy. That being said, however, it is our general view that the payment of the premium by the corporation for the additional rider, of which the shareholder's wife and child would be beneficiaries, would constitute a taxable benefit received by the shareholder pursuant to subsection 15(1) of the Income Tax Act.

In one of the other scenarios, the concern appears to be whether certain rollover provisions in the Income Tax Act (such as subsection 148(8.2) rollovers) apply to a transfer of a life-insurance policy to a common law spouse who is not divorced from his or her first spouse. According to the extended meaning of "spouse" in subsection 252(4) of the Act, a spouse of a taxpayer includes a person of the opposite sex who has been cohabiting in a conjugal relationship with the taxpayer for at least 12 months or who is a parent of a child of whom the taxpayer is also a parent. Accordingly, a taxpayer may have two spouses for income tax purposes, if he or she is not divorced from a spouse to whom he or she was legally married.

Another one of your concerns involves the use of a corporate-owned universal life policy to fund the retirement benefits of the shareholder. Although the information provided in your letter was limited, it seems that the corporation would assign its universal life insurance policy as security for a loan to be taken out by the shareholder. In this situation, it is our view that the fair market value of the right to use the corporation's property as security for a loan may be considered a taxable shareholder benefit pursuant to subsection 15(1) of the Act. The value of a benefit arising from the right to use someone else's property as security for a loan is a question of fact. One method of calculating the fair market value of such a right might be to compare the difference between the interest rates charged with and without the corporation's collateral security. Another method might be to determine what the shareholder would have to pay a third party to provide a similar collateral security. The appropriate method of computing the fair market value of such right can only be determined on a case-by-case basis.

Yours truly,

John Oulton
for Director
Business and Publications Division
Income Tax Rulings Directorate

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