Principal Issues: What is CRA's position following the decision in The Queen v. Innovative Installation Inc.
Position: Decision of the Court applicable in similar situations.
Reasons: Decision in The Queen v. Innovative Installation Inc.
XXXXXXXXXX Jelena Pajkovic (613) 941-0782 2011-040199
July 4, 2011
Dear XXXXXXXXXX,
Subject: CRA's position following the judgment in The Queen v. Innovative Installation Inc., 2010 FCA 285.
This is in response to your email of April 6, 2011 in which you asked us what the position is of the Canada Revenue Agency (the "CRA") following the judgment of the Federal Court of Appeal in The Queen v. Innovative Installation Inc., 2010 FCA 285.
Unless otherwise indicated, all legislative references herein are to the provisions of the Income Tax Act (the "Act").
In The Queen v. Innovative Installation Inc., Innovative Installation Inc. ("Innovative") borrowed a certain amount from the Royal Bank of Canada ("RBC"). Innovative was also a party to a group creditor life insurance policy issued by the Sun Life Assurance Company ("Sun Life") to RBC, the holder of that insurance policy. That life insurance policy provided that in the event of the death of a key figure designated by Innovative, Sun Life was obligated to pay RBC an amount equal to the balance of the debt owed by Innovative to RBC. In addition, RBC was required under that life insurance policy to apply the life insurance proceeds against the outstanding balance of Innovative's loan from RBC. Innovative paid the monthly premiums for the coverage provided under that insurance policy.
At the time of the death of the key person, Sun Life paid RBC $196,922 as life insurance proceeds, an amount equal to the balance of the loan due to RBC by Innovative at the time of the key person's death. Innovative included in the calculation of its Capital Dividend Account ("CDA") the amount of $196,922 paid by Sun Life to RBC.
The issue in that case was whether Innovative could take into account, in computing its CDA, the life insurance proceeds received by RBC under the life insurance policy.
The Tax Court of Canada (2009 TCC 580) concluded that Innovative had "received" the insurance proceeds paid by Sun Life to RBC since the balance of the loan it owed to RBC had been reduced and that its net worth had thus increased.
The Federal Court of Appeal upheld that decision by also stating that, in the case of Innovative, RBC had merely played the role of intermediary in passing on the life insurance proceeds.
The Federal Court of Appeal also found that for purposes of applying subparagraph (d)(ii) of the definition of CDA in subsection 89(1), there was only one recipient of the life insurance proceeds, who was Innovative.
In factual situations similar to the Innovative case, the CRA will apply the position adopted by the Court in that case.
Consequently, in a situation where a corporation can demonstrate that life insurance proceeds that were paid directly to a financial institution have reduced its debt to the financial institution, the life insurance proceeds will be considered as "received" by that corporation for the purpose of applying subparagraph (d)(ii) of the definition of CDA in subsection 89(1).
In addition, comments in paragraph 6 of Interpretation Bulletin IT-430R3, Life Insurance Proceeds Received by a Private Corporation or a Partnership as a Result of a Death will be modified accordingly at the earliest opportunity.
We hope that our comments are of assistance.
Best regards,
Maurice Bisson, CGA
Manager
Corporate Reorganizations and Resource Industry Section
Corporate Reorganizations and Resource Industry Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch