Principal Issues: [TaxInterpretations translation] Application of section 70(5.3) to two scenarios.
Position: None.
Reasons: Subsection 70(5.3) does not permit the value of shares held by a taxpayer immediately before death to be determined, nor does it specify how the value of a life insurance policy is to be allocated among several classes of shares whose value depends on the proceeds of a life insurance policy.
Financial Strategies and Financial Instruments Roundtable-- 2006 APFF CONFERENCE
Question 7
Subsection 70(5.3) of the Act
Subsection 70(5.3) provides that, for the purposes of the deemed disposition rules in subsection 70(5), the fair market value of a share of a corporation that is held by a taxpayer is to be determined as though the fair market value at that time (i.e., immediately before the taxpayer's death) of any life insurance policy that stipulates that the taxpayer's life is insured were equal to the cash surrender value of the policy at that time.
Could the CRA clarify the scope of subsection 70(5.3) in the following situations:
1. Mr. A owns all the issued and outstanding shares of Corporation 1 and Corporation 2 (making them sister corporations). Corporation 1 has a universal life insurance policy. The total death benefit is $2,000,000, including a cash surrender value of $500,000. Corporation 1 has named Corporation 2 as the beneficiary of the entire insurance benefit.
2. Mr. A holds all the issued and outstanding shares of Corporation 1. Mr. A holds 1,000,000 preferred shares of Corporation 2, with a fixed redemption value of $1,000,000. Those shares were issued to him as part of an estate freeze transaction. The common shares of Corporation 2 were issued to a family trust of which Mr. A's two adult children are the sole beneficiaries. Corporation 1 has a universal life insurance policy with a total death benefit of $2,000,000, including a cash surrender value of $500,000. Corporation 1 has named Corporation 2 as the beneficiary of the entire insurance benefit.
CRA Response
Subsection 70(5.3) does not permit the valuation of shares held by a taxpayer before death. The effect of this provision is only to indicate what value should be assigned to a life insurance policy for the purpose of determining the fair market value of a property that is deemed to have been disposed of under, inter alia, subsection 70(5). In the situations described above, subsection 70(5.3) would therefore only have the effect of fixing the fair market value of Mr. A's life insurance policy at its cash surrender value (within the meaning of subsection 148(9)) for the purpose of determining the fair market value of the shares held by Mr. A immediately before his death. Subsection 70(5.3) does not, however, specify the impact of the value of the life insurance policy on the value of the property held by a taxpayer immediately before the taxpayer’s death, nor does it specify how that value is to be allocated among different properties or different classes of shares whose value depends on the life insurance proceeds, if any. The issue of determining the fair market value of shares owned by a person immediately before death and how to allocate the fair market value of a life insurance policy among different classes of shares is a question of fact that requires, inter alia, an analysis of the life insurance policy and the rights inherent in each class of shares whose value is based on the proceeds of that policy. The Income Tax Rulings Directorate does not generally provide opinions on valuation issues, which are the responsibility of CRA's valuation services. Any questions regarding the application of valuation principles to scenarios such as those described above may be directed to CRA's Valuation and Technical Applications Division.
Éric Allard-Pouliot
(613) 946-3553
October 6, 2006
2006-019711