Principal Issues: [TaxInterpretations translation] Parentco is the owner, beneficiary and premium payer of a life insurance policy in which the insured is its principal shareholder.
1: Parentco makes a change of beneficiary in favour of its subsidiary.
2: Parentco transfers ownership of the insurance policy to its subsidiary. The latter now pays the premiums but Parentco remains the beneficiary of the life insurance policy.
1-A) Does the change of beneficiary result in a disposition of the policy?
1-2 B) Do subsections 15(1) or 246(1) apply?
1-2 C) Does the subsidiary have to take into account Parentco's ACB in the calculation of its CDA and vice versa?
1-2 D) Could subsection 245(2) apply?
Position: 1-A) No
1-B) 15(1) : No; 246(1) possibly
2-B) 15(1) : Yes; Question of fact
1-2 C) No
1-2 D) possibly
Reasons: 1A) paragraphs 148(9)(d) and 148(10)(d). Merely an exercise of a provision in a life insurance policy
1B) Question of fact.
2B) Determining a shareholder benefit is a question of fact. In this scenario, where the subsidiary becomes impoverished and the parent receives an economic benefit, there is a shareholder benefit under subsection 15(1). See APFF 2009 (File 2009-032976).
1-2 C) 89(1)d) "capital dividend account" and 148(9) "adjusted cost base".
1-2 D) Question of fact
2007-025725
XXXXXXXXXX Catherine Ayotte
Notary, M. Fisc
November 19, 2009
XXXXXXXXXX
Re: Subsection 15(1) of the Income Tax Act and Life Insurance
This is further to your letter of September 11, 2007 in which you asked us to confirm the application of certain provisions of the Income Tax Act with respect to the holding of a life insurance policy in a corporate context. Your questions relate to two scenarios: the first involving the holding of a life insurance policy and the payment of premiums by the parent corporation while the subsidiary is the beneficiary of the policy; the second where the parent corporation is the beneficiary of the life insurance policy while the subsidiary is the policyholder and pays the premiums.
It appears to us that the situation described in your letter may constitute an actual situation involving taxpayers. As explained in Information Circular 70-6R5, it is not the practice of the Directorate to comment on proposed transactions involving specific taxpayers otherwise than in the form of an advance income tax ruling. If your situation involves a specific taxpayer and a completed transaction, you should provide all relevant facts and documentation to the appropriate Tax Services Office for its views. The determination of the tax consequences of a life insurance policy can only be made after a review of all the facts of a particular situation and involves an examination of the terms of the insurance contract and other relevant agreements and the relationship between the various parties. We are, however, prepared to provide the following general comments which may be of assistance to you.
Please note that unless otherwise indicated, all legislative references herein are to the provisions of the Income Tax Act.
Question 1
If the parent company, which is the owner and beneficiary of a life insurance policy, changes the beneficiary to its subsidiary, does this change result in the disposition of the life insurance policy?
Response 1
The definition of "disposition" in paragraph 148(9)(d) specifies that there may be a disposition of an interest in a life insurance policy solely by operation of law. In our view, a disposition by operation of law alone can occur if a change to the existing contract results in the creation of a new contract under the Civil Code of Québec. Such a determination can only be made after an examination of all the facts of a particular situation, the terms of the contracts and the amendments thereto. According to paragraph 148(10)(d), a policyholder is deemed not to have disposed of or acquired an interest in a life insurance policy as a result only of the exercise of any provision of the policy. Generally, the Canada Revenue Agency (CRA) considers that the change of beneficiary, in and of itself, does not constitute an amendment that results in a disposition of the life insurance policy.
Question 2
Would subsection 15(1) apply to the various scenarios described in your letter?
Response 2
The question of whether, under subsection 15(1), a particular corporation has conferred a benefit on a shareholder is generally a question of fact.
In general, the CRA considers that subsection 15(1) would be applicable where a transaction or series of transactions would result in the impoverishment of a corporation and an economic benefit to a shareholder. In Del Grande v. The Queen, 93 DTC 133(T.C.C.), the court stated the following:
Paragraph 15(1)(c) contemplates the conferral of a genuine economic benefit upon the shareholder. The word "confer" implies the bestowal of bounty or largesse, to the economic benefit of the conferee and a corresponding economic detriment of the corporation.
In a situation where the subsidiary owns and pays the premiums for a life insurance policy of which the parent corporation is the beneficiary, the CRA is of the view that the subsidiary would have conferred a benefit on its shareholder, the parent corporation, by paying the premiums for the life insurance policy. Consequently, subsection 15(1) should apply so that the parent corporation has to include in computing its income the value of the benefit that the subsidiary would have conferred on it as income from property.
The above interpretation represents a change in position from what was stated in E 2004-006546 and E 9824645 and will apply as of calendar year 2010. However, in the case of a previously issued life insurance policy, the amount of the benefit will be required to be included in the shareholder's income under subsection 15(1) effective for the 2011 calendar year.
In a situation where a parent corporation pays the premiums for a life insurance policy that it owns and of which the subsidiary is a beneficiary, there is no benefit to the shareholder under subsection 15(1).
Question 3
For the purpose of calculating its capital dividend account, is a corporation that is a beneficiary of a life insurance policy required to take into account the adjusted cost base of that policy to the other corporation that owns the policy?
Response 3
Paragraph (d) of the definition of "capital dividend account" in subsection 89(1) provides that the amount by which the proceeds of a life insurance policy received by a private corporation after May 23, 1985 as a beneficiary under a life insurance policy in consequence of the death of any person exceeds the adjusted cost basis (within the meaning assigned by subsection 148(9)) of the policy to the corporation immediately before the death of the person is added to the corporation's capital dividend account. The calculation of the adjusted cost basis of a life insurance policy is performed only for the policyholder. In this situation, the proceeds of a life insurance policy that are included in paragraph (d) of the capital dividend account of the corporation that is the beneficiary of the policy in subsection 89(1) are not reduced by the adjusted cost basis of the policy that was held by another corporation before the death of the insured.
Question 4
Could subsections 245(2) or 246(1) apply to the different situations set out in your letter?
Response 4
The application of subsection 246(1) is based on an assessment of the facts specific to a particular situation. The CRA is not in a position to provide an opinion in a hypothetical situation. However, it is our view that subsection 246(1) could apply on a case-by-case basis in a situation where the parent corporation that is the holder of a life insurance policy designates a subsidiary as the beneficiary.
Whether subsection 245(2) applies to a series of transactions is a question of fact that can only be determined after a review of all the elements of a particular situation. The CRA does not normally rule on the application of section 245 in the context of a request for a technical opinion because all of the relevant facts may not be known. However, we would like to point out that the series of transactions described in your letter appear to be for the purpose of obtaining tax benefits and could be considered abusive for the purposes of subsection 245(4). Indeed, the CRA stated at the October 2009 APFF conference that there may be an argument for applying subsection 245(2) in situations where the owner and beneficiary of a life insurance policy are different corporations.
We hope that our comments are of assistance.
Best regards,
Ghislain Martineau
Manager
Financial Sector and Exempt Entities Section
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch.