Principal Issue: [TaxInterpretations translation]
For the purposes of subsection 70(5) of the Act, will the unpaid amount of a policy loan immediately before the death of the insured be taken into account as any other liability of the corporation in determining the FMV of the corporation's shares?
Position: A question of valuation.
Reason:
Application of normal valuation principles.
FINANCIAL PRODUCTS ROUNDTABLE
APFF - CONFERENCE 2003
Question 5
Determining the value of a corporate-held life insurance policy
Suppose that a corporation holds a life insurance policy on the life of a shareholder. Such life insurance policy has a cash surrender value (CSV) of $1 million. The corporation receives a policy loan in an amount equal to the full CSV. The corporation invests that amount in marketable securities. The insured dies before the policy loan is repaid.
Pursuant to subsection 70(5.3), in determining the fair market value (FMV) of the deceased's shares for the purposes of subsection 70(5), the FMV of the life insurance policy held by the corporation is its CSV as defined in subsection 148(9). Pursuant to the definition of CSV in subsection 148(9), the CSV is to be determined without regard to any policy loans. On this basis, the FMV of the policy used to determine the FMV of the deceased individual's shares would be equal to the full FMV, in this case $1 million. However, the FMV of the corporation's other assets will include the $1 million of marketable securities acquired by the corporation with the proceeds of the policy loan.
Will the CCRA confirm that for the purposes of subsection 70(5), the tax treatment of the policy loan will be that of any other liability of the corporation and, consequently, the amount will be taken into account in determining the FMV of the deceased's shares?
CCRA Response
Subsection 70(5.3) specifies that the FMV of the life insurance policy that is to be used in determining the FMV of the deceased's shares is the FMV of that policy within the meaning of subsection 148(9). Consequently, in determining the FMV of the policy as an asset of the corporation, the unpaid amount of a policy loan immediately before the death of the individual on whose life the insurance was purchased is to be ignored. In determining whether the policy loan is otherwise relevant to the determination of the FMV of the deceased individual's shares for purposes of subsection 70(5), the principles that normally govern the valuation process would be applied.
Louise J. Roy
October 10, 2003
2003-003567