Principal Issues: Whether a shareholder receiving an interest in a life insurance policy from a corporation as redemption proceeds for preferred shares the shareholder previously owned in the corporation should be considered as having given consideration for the interest in the life insurance policy?
Position: Yes.
Reasons: Based on the meaning of the word "consideration", we are of the view that the shareholder is giving consideration for purposes of clause 148(7)(a)(ii)(B) when its shares are being redeemed. As we did in the case of a transfer of an interest in a life insurance policy through the payment of a dividend in kind, we will bring this issue to the attention of the Department of Finance as it appears questionable that the result under subsection 148(7) be different depending on whether the policy is transferred through a dividend in-kind or rather as proceeds for the redemption of shares.
FINANCIAL STRATEGIES AND INSTRUMENTS ROUNDTABLE 5 OCTOBER 2018
2018 APFF CONFERENCE
Question 1
Transfer of a life insurance policy by way of a dividend in kind or a redemption of preferred shares
At the Canadian Life and Health Insurance Association (CLHIA) Roundtable held on May 18, 2017, the Canada Revenue Agency ("CRA") confirmed that the transfer of a life insurance policy held by a subsidiary to its parent corporation may be by way of a dividend in kind, and such dividend must be equal to the fair market value ("FMV") of the policy. However, the proceeds of disposition to the subsidiary are equal to the greater of the cash surrender value and the adjusted cost base ("ACB") since the payment of a dividend does not constitute the giving of consideration. The CRA referred to Algoa Trust v. The Queen (footnote 1), according to which the payment of a dividend constitutes a transfer for no consideration for the purposes of section 160 of the Income Tax Act (footnote 2). In addition, there is another more recent case, Canada v. Gilbert (footnote 3) of the Federal Court of Appeal, which states in paragraphs 11 to 14 that there is no consideration given on the payment of a dividend by a corporation to its shareholder.
That being said, we would now like to know whether the CRA's interpretation would be the same if, instead of paying a dividend in kind so as to transfer the policy to the parent company, the subsidiary redeemed a number of preferred shares having the fair market value of the policy. Here is the example that was given:
Cash surrender value of the policy: $50,000
ACB: $25,000
Fair Market Value: $100,000
Under subsection 148(7) of the Act, the proceeds of disposition for the subsidiary are equal to the greater of:
a) Cash surrender value: $50,000
b) Consideration given: ?
c) ACB: $25,000
Question to the CRA
Is the redemption of shares the giving of consideration? If so, is it correct to say that the proceeds of disposition for the subsidiary will be equal to $100,000 and that it will have to report a gain on the policy of $75,000 ($100,000 - $25,000) while in the case of a dividend in kind, the subsidiary would be taxed on a gain of $25,000 ($50,000 - $25,000)?
CRA Response
The jurisprudence indicates that the word "consideration" is a broad term, which can be either a right, an interest, a profit or a benefit for one party, or a waiver, a disadvantage, a loss or a liability for the other party.
A shareholder who receives property from a corporation in connection with the repurchase of the shareholder’s shares by the corporation disposes of those shares to the corporation in exchange for the property the shareholder receives. In the absence of an indication to the contrary in the context, it appears to us that the word "consideration" must, for the purposes of subsection 148(7), receive the broad meaning generally accorded to it in the jurisprudence. Thus, for purposes of clause 148(7)(a)(ii)(B), where, on a share redemption, the redemption price paid by a corporation is an interest in a life insurance policy that the corporation transfers to the shareholder, the CRA is of the view that the shareholder gave consideration (the redeemed shares) to the corporation for the interest thus transferred.
The CRA is aware that in light of that conclusion, the result differs depending on whether the transfer of interest is by way of a dividend in kind or a redemption of shares. It is not clear that that inconsistency is consistent with tax policy. At the CLHIA Roundtable in May 2017, the CRA indicated that it was not clear that the result, in the case of a dividend-in-kind transfer, was consistent with tax policy. The CRA also indicated that it had notified the Department of Finance of this situation. The CRA will also bring to its attention its conclusion where the transfer occurs as part of a share redemption.
Finally, note that in the presence of a taxable inter-corporation dividend (actual or deemed), the potential application of subsection 55(2) should be considered, depending on the facts and circumstances of a particular situation.
Mélanie Beaulieu
(613) 670-8905
5 October 2018
2018-076152
FOOTNOTES
Due to our system requirements, footnotes contained in the original document are reproduced below:
1 93 DTC 405 (TCC).
2 R.S.C., 1985, c. 1 (5th Supp.) (“ITA”).
3 2007 FCA 136.