Principal Issues: In a given fact situation, a corporation ("OPCO") would be the owner of a life insurance policy on the life of its shareholder ("A"). The beneficiary of the policy would be the spouse of A ("B"). The life insurance premiums were paid by OPCO. This situation would result in a taxable benefit to A pursuant to subsection 15(1). Whether the amount or value of such benefit should be based on the life insurance premiums and/or the death benefit received by B and paid under the life insurance policy in consequence of the death of A.
Position: The amount or value of the shareholder benefit should be based on the life insurance premiums paid by OPCO, and not on the death benefit paid under the life insurance policy. The application of subparagraph 152(4)(a)(i), which allows the Minister to assess or reassess tax, interest or penalties for a taxation year after the taxpayer's normal reassessment period if the taxpayer or the person filing the return has made any misrepresentation attributable to neglect, carelessness or wilful default, should be considered in the circumstances.
Reasons: Wording of the Act and previous positions.
June 29, 2004
Bathurst Tax Centre Income Tax Rulings Directorate
201 St-George St., P.O. 8888
Bathurst NB E2A 1R5 S. Prud'Homme
(613) 957-8975
Attention: M. Gaston Thomas 2004-008190
Request for opinion - Section 15(1) and life insurance
This is in response to your memorandum of June 14, 2004, in which you requested our opinion regarding the application of subsection 15(1) of the Income Tax Act (the "Act") in a particular situation.
Unless otherwise indicated, all references to a statutory section or included provision in this letter are to a section of the Act or one of its provisions.
1) Particular Situation
You have presented us with the situation described below (the "Particular Situation") as part of your request for an opinion.
(a) Mr. XXXXXXXXXX ("A") held all of the issued and outstanding shares of the capital stock of XXXXXXXXXX ("OPCO") until the time of his death.
(b) OPCO was the policyholder and holder of an insurance policy on the life of A. That insurance policy was taken out in XXXXXXXXXX. The beneficiary of that insurance policy was Ms. XXXXXXXXXX ("B"), A's wife. OPCO paid annual premiums in the amount of approximately $XXXXXXXXXX for the years XXXXXXXXXX to XXXXXXXXXX inclusive in respect of that policy.
We understand that OPCO did not deduct those insurance premiums in computing its income for tax purposes. We also understand that the insurance policy on the life of A was always an exempt policy for purposes of the Act.
(c) A died on XXXXXXXXXX. Under the terms of the insurance policy, a benefit in the amount of approximately $XXXXXXXXXX was paid to B following A's death.
(2) Your Question regarding the Particular Situation
You asked for our opinion respecting the application of section 15(1) in the context of the Particular Situation.
Specifically, you are of the view that, in the context of the Particular Situation, OPCO conferred a benefit on its shareholder, A, by paying the premiums for the life insurance policy of which B, A's wife, was the beneficiary. Consequently, you are of the view that subsection 15(1) applied to require A to include in income the value of a benefit that OPCO conferred on him in the particular circumstances.
However, you wish to know whether the value of the benefit referred to in section 15(1) is the amount of the premiums paid by OPCO and/or the benefit paid by the insurance company under the life insurance policy, following A's death.
3) Our Comments on the Particular Situation
We are of the view that, in the Particular Situation, the value of the benefit conferred on A under subsection 15(1) should be the amount of the insurance premiums paid by OPCO. The value of the benefit under subsection 15(1) should not include the benefit paid to B under the terms of the life insurance policy. To the extent that this insurance policy was an exempt policy for purposes of the Act, this benefit paid to B would not be taxable.
Furthermore, we are of the view that, in the context of the Particular Situation, you should consider the application of subparagraph 152(4)(a)(i) which, inter alia, allows the Minister to assess or reassess tax, interest or penalties payable by a taxpayer under Part I after the expiry of the taxpayer's normal reassessment period for the year where the taxpayer has made a misrepresentation as a result of a negligent or reckless act of commission or default.
For your information, unless exempted, a copy of this memorandum will be severed using the Access to Information Act criteria and placed in the Canada Revenue Agency's electronic library. A severed copy will also be distributed to the commercial tax publishers for inclusion in their databases. The severing process will remove all material that is not subject to disclosure, including information that could disclose the identity of the taxpayer. Should your client request a copy of this memorandum, the electronic library version can be provided. Alternatively, the client may request a severed copy using the Privacy Act criteria, which does not remove client identity. Requests for this latter version should be made by you to Ms. Jackie Page at (819) 994-2898. A copy will be sent to you for delivery to the client.
Should you require any additional information regarding the above, please do not hesitate to contact us.
Stéphane Prud'Homme, Notary, M. Fisc.
For the Director
Corporate Reorganizations and Industrial Resources Division
Income Tax Rulings Directorate
Policy and Planning Branch