Question 2 at the May 4, 2010 CALU Roundtable concerned the situation where (A) Holdco holds an insurance policy on the life of its shareholder, pays the premium and designates its subsidiary as the beneficiary, or (B) the same situation except that the subsidiary is designated as irrevocable beneficiary and reimburses Holdco for the premiums, or (C) there are two sisters (Corporations 1 and Corporation 2) wholly-owned by Mr. A, with Corporation 1 holding an insurance policy on Mr. A's life and paying the premiums, while Corporation 2 is designated as beneficiary and reimburses Corporation 1 for the premiums paid.
CRA confirmed that s. 15(1) would not apply in Situations A and C, but that s. 246(1) could apply in Situation A, i.e., where Holdco designates its subsidiary as beneficiary. Why should the subsidiary be taxable on the amount of the premium, since Holdco could just as readily pay an amount equal to the premium, in the form of a loan or capital injection? CRA responded:
The application of section 9, paragraph 12(1)(x), subsections 15(1), 245(2) and 246(1) is a question of fact and each situation must be examined individually. … [T]he CRA will examine any situation that involves a corporate group and where the life insurance proceeds included in a corporation's capital dividend account is not reduced by the adjusted cost base of the policy. This can occur where a corporate group holds the policy and another corporation in the group is beneficiary.