Principal Issues: whether 69(5) or 148(7) applies on 88(2) wind-up
Position: likely 69(5)
Reasons: seems more specific, but we require an actual fact situation for a full analysis
CALU - Conference for Advance Life Underwriting (2005)
Question 3
Distribution of a Life Insurance Policy on the Winding-Up of a Corporation
Subsection 88(1) Winding-Up
In response to Question 4 at the 1992 CALU Annual Conference, the CRA expressed the view that where a corporation that owns a life insurance policy winds up into another corporation in circumstances such that subsection 88(1) applies, rollover treatment applies to the distribution of the policy. The subsidiary corporation is deemed to have disposed of the policy for proceeds of the disposition equal to the adjusted cost basis of the policy to the corporation, and the parent corporation is deemed to be a continuation of the subsidiary for the purposes of determining the adjusted cost basis of the policy to the parent.
The CRA's analysis in support of this position does not make reference to subsection 148(7). That provision applies, inter alia, where a corporation disposes of an interest in a life insurance policy by way of distribution to any person, or in any manner whatever to a non-arm's length person. The disposition of a life insurance policy in the circumstances described above is a type of disposition referred to in subsection 148(7). Where the subsection applies, it deems the interest to be disposed of for proceeds of the disposition equal to the cash surrender value of the policy, and to be acquired at a cost equal to this amount.
Another point not explicitly considered in the CRA's analysis is the interaction between paragraph 87(2)(j.4) (which applies by virtue of paragraph 88(1)(e.2)) and paragraph 88(1)(c). Paragraph 87(2)(j.4) deems the parent corporation to be the same corporation as, and a continuation of, the subsidiary corporation for purposes of determining the adjusted cost basis of the distributed policy. Paragraph 88(1)(c) deems the cost of the policy to the parent to equal the subsidiary's proceeds of disposition.
Subsection 88(2) Winding-Up
If a Canadian corporation is wound up in circumstances such that subsection 88(2) applies, the property distributed on the winding-up is deemed by subsection 69(5) to have been disposed of for fair market value proceeds. This deemed disposition is for the purpose of computing the corporation's income. The shareholder to whom a particular property is distributed is deemed to have acquired the property at a cost equal to its fair market value. It is unclear whether these rules apply with respect to the distribution of an interest in a life insurance policy, or whether subsection 148(7) applies.
Questions:
(a) Does the CRA agree that subsection 148(7) is not applicable on the distribution of a life insurance policy in connection with the winding-up of a corporation in circumstances such that subsection 88(1) is applicable?
(b) In the CRA's view, what effect, if any, does paragraph 88(1)(c) have on the determination of the adjusted cost basis of a life insurance policy that has been distributed to a parent corporation?
(c) In the case of the winding-up of a corporation to which subsection 88(2) applies, which of subsection 69(5) and subsection 148(7) is applicable to the distribution of an interest in a life insurance policy?
Agency's Response
(a) Yes. The specific rules for windings-up in subsection 88(1) will apply and will override the rules in subsection 148(7) with respect to non-arm's length dispositions of life insurance policies.
(b) Pursuant to paragraphs 88(1)(e.2) and 87(2)(j.4), the adjusted cost basis ("acb") of the life insurance policy to the subsidiary corporation will be the acb of the life insurance policy to the parent corporation. Accordingly paragraph 88(1)(c) has no effect on the calculation of the acb of the policy to the parent.
(c) The general rule is that where two provisions in the same statute conflict, the more specific provision should take precedence. In this case there is no clear indication as to which provision is the more specific. While we are inclined to the view that subsection 69(5) would apply where the disposition of the policy occurs pursuant to a subsection 88(2) wind-up, we would want to review the facts of the particular case to ensure that this provides for a reasonable result.
May 3, 2005