5 January 1987 Income Tax Severed Letter

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.

January 5, 1987

TO: M. Hiltz Director Current Amendments and Regulations Division

FROM: Peter E. Salvatori 957-9795

RE Compulsory Share Redemptions From Deceased's Estate Subsections 70(5), 164(6), 83(2.1) (repealed) and paragraph 53(2)(r) (repealed) ----------------------------------------------------

We are writing to bring to your attention a problem which we believe may have been revived as a result of the repeal earlier this year of subsection 83(2.1) of the Act, which created the life insurance capital dividend account ("licda"), and particularly of paragraph 53(2)(r) of the Act, which provided for a reduction in the adjusted cost base of shares in certain circumstances.

Prior to the existence of the licda and the 'grind' referred to above, it was possible to eliminate the capital gain which might arise pursuant to paragraph 70(5)(a) of the Act upon the deemed disposition of a deceased taxpayer's shares of a corporation where the corporation was the beneficiary of a life insurance policy on the deceased taxpayer's life. This was accomplished by having the corporation redeem the shares from the estate. A deemed dividend would arise on the redemption pursuant to subsection 84(3) of the Act, but with no tax consequences to the estate because the corporation would use the life insurance policy proceeds to redeem the shares and elect pursuant to subsection 83(2) of the Act on the full amount of the dividend. For capital gains purposes, the amount of the dividend would not constitute proceeds of disposition because of paragraph 54(h)(x) of the Act, and the estate would by paragraph 70(5)(c) of the Act be deemed to have acquired the shares at a cost equal to their fair market value. The resulting capital loss to the estate on the redemption would be carried back pursuant to subsection 164(6) of the Act to offset the capital gain realized by the deceased taxpayer in his last taxation year.

This transaction was effectively negatived by excluding the proceeds of a life insurance policy from the capital dividend account, including such amount in the licda and reducing the adjusted cost base of the shares held by the estate by the amount of the deemed dividend arising upon redemption pursuant to paragraph 53(2)(r) of the Act. The inclusion in the capital dividend account of amounts formerly included in licda would seem coupled with the repeal of paragraph 53(2)(r) of the Act to invite the type of planning that was previously legislated against.

If we may be of assistance in connection with your review of the foregoing problem, please advise.

Director Financial Industries Division Rulings Directorate Legislative and Intergovernmental Affairs Branch