Principal Issues: [TaxInterpretations translation] What is the value of the benefit under subsection 15(1) in a situation where a parent corporation changes the beneficiary of a life insurance policy from its subsidiary to one of its shareholders and the insured person does not have more than a few months to live?
Position: None.
Reasons: Question of fact.
Financial Strategies and Financial Instruments Roundtable, 7 October 2017
2017 APFF Conference
Question 9 - Taxable benefit relating to the change of beneficiary of a life insurance policy
A corporation is the policyholder of a life insurance policy on the life of Mr. A, one of the two shareholders of the corporation. The beneficiary of the life insurance policy is the subsidiary of that corporation. The life insurance policy has a substantial cash surrender value.
The corporation wishes to change the beneficiary of the policy and to designate the uninsured shareholder, Mr. B, as the beneficiary of the policy.
A change of beneficiary does not constitute a disposition under subsection 148(9); however, there will be a taxable benefit to Mr. B under the provisions of subsection 15(1).
On June 29, 2004 (footnote 1), the CRA had to determine the value of a shareholder benefit in the following situation: a corporation held a life insurance policy on the life of Mr. X, its sole shareholder, and it paid the premiums. The corporation did not deduct the premiums. Mr. X's wife was named as beneficiary of the policy. Mr. X died. The executor asked whether the value of the benefit conferred on the shareholder corresponds to the amount of the premiums paid by the corporation or to the death benefit paid by the insurer.
The CRA confirmed that the shareholder benefit was the amount of all premiums paid by the corporation, and that the value of the benefit referred to in subsection 15(1) should not include the benefit paid to the wife.
The question posed in the situation today is whether your position would be the same knowing that the life expectancy of the insured is only a few months at the time of the change of beneficiary.
CRA Response
The question of whether, pursuant to subsection 15(1), a particular corporation has conferred a benefit on a shareholder is generally one of fact.
In general, the CRA considers that subsection 15(1) is applicable where a transaction or series of transactions results in the impoverishment of a corporation and an economic benefit to one of its shareholders. In the above situation, we believe that the corporation conferred a benefit on a shareholder. However, we do not know all the facts to be able to determine whether the benefit is conferred on Shareholder A or Shareholder B.
In determining the value of a benefit, the Federal Court of Appeal in Youngman v. The Queen (footnote 2) indicated the analytical approach to be followed:
In order to assess the value of a benefit, for the purposes of paragraph 15(1)(c), it is first necessary to determine what that benefit is or, in other words, what the company did for its shareholder; second, it is necessary to find what price the shareholder would have had to pay, in similar circumstances, to get the same benefit from a company of which he was not a shareholder.
The determination of the value of a benefit under subsection 15(1) is an issue that can only be resolved after a thorough analysis of the facts surrounding a particular situation.
However, in order to establish the value of the benefit in the situation described, the CRA would consider all relevant facts surrounding the particular situation. In particular, depending on the circumstances, the CRA may consider the amount of premiums that would be payable if Shareholder A entered into a new life insurance policy at the time of the change in beneficiary, the fair market value of the insurance policy or the total amount that the insurer will pay by virtue of the policy.
Louise J. Roy
(613) 957-8963
2011-041328
FOOTNOTES
Due to our system requirements, footnotes contained in the original document are reproduced below:
1 Window on Canadian Tax - 2004-0081901I7
2 90 DTC 6322