Principal Issues: [TaxInterpretations translation]
Situation where a corporation has a critical illness policy in respect of the sole shareholder.
1. Are the premiums paid by the corporation deductible?
2. Is the payment of the premiums by the corporation a taxable benefit to the shareholder?
3. Will the benefits received be taxable?
Positions:
1. No
2. Yes if the shareholder is the beneficiary of the policy.
3. The benefits received would not be taxable.
Reasons:
1. Premiums are not incurred to earn income from a business or property.
2. Application of 15(1)
3. Legislative and case law analysis.
FINANCIAL PRODUCTS ROUNDTABLE
APFF - CONFERENCE 2003
Question 1
Critical illness insurance
A Canadian-controlled private corporation is the policyholder of a critical illness policy insuring its sole shareholder against critical illness.
Situation 1: The shareholder is the beneficiary of the benefit.
Situation 2: The benefit is payable to the policyholder.
Questions:
For each of the situations:
1. Are the premiums paid by the corporation deductible?
2. Is the payment of the premiums a taxable benefit to the shareholder?
3. Will the benefit received be taxable?
CCRA Response
In order to determine the tax consequences of a critical illness policy, it must be determined whether the policy is a sickness or accident policy or a life insurance policy subject to sections 148 and 12.2.
Section 138(12) defines a life insurance policy for the purposes of the I.T.A. However, this definition is not exhaustive. The term "sickness or accident insurance" is not defined in the I.T.A. Consequently, one must rely on the common meaning as used in the industry. In this regard, the provincial insurance act under which the policy is governed will be relevant.
Where a policy is written in Quebec by persons resident in Quebec, the policy is subject to the requirements of the Quebec Insurance Act and the Civil Code of Quebec (C,C.Q.).
For the purposes of this response, we have assumed that the policy is subject to the requirements of the Quebec Insurance Act and the C.C.Q. and that the critical illness insurance contract provides exclusively for a critical illness benefit and is a contract of sickness insurance.
In the situations described above, we are of the view that premiums paid by a corporation under a critical illness insurance policy that it owns are not deductible in computing its income by virtue of paragraphs 18(1)(a) and/or 18(1)(b).
Subject to certain exceptions, subsection 15(1) provides that the value of a shareholder benefit conferred by a corporation in a taxation year is included in computing the shareholder’s income for the year. This subsection does not provide an exception for benefits resulting from premiums paid under a critical illness insurance policy.
Consequently, where a corporation holds a critical illness policy and the benefit is payable to it, we are of the view that the payment of the premiums by the corporation would not result in a taxable shareholder benefit pursuant to subsection 15(1). However, if the shareholder is the beneficiary under the policy, the payment of the premiums will constitute a benefit for which the shareholder will be required to include the amount of the benefit in computing income pursuant to subsection 15(1).
Since the gain on the disposition of an insurance policy is excluded from the definition of capital gain by virtue of subparagraph 39(1)(a)(iii), the benefits to be received by the shareholder or corporation under a critical illness insurance contract will not be taxable as a capital gain. Furthermore, the provisions of section 148 do not apply to a contract of sickness or accident insurance that is not a life insurance contract and there is no specific provision in the Act for the inclusion of such benefits in such a case.
Louise J. Roy
October 10, 2003
2003-003538