Prior to a sale by Holdco of all the shares of Opco to an arm's length purchaser for $1,000,000, Opco will transfer its interest in the Policy on the life of Mr. X (the sole shareholder of Holdco) to Holdco as a dividend-in-kind. The Policy has a nil ACB, $200,000 FMV, $100,000 CSV and $1,000,000 death benefit. What will be the impact of the dividend-in-kind on the computation of safe income on hand?
Timing of addition to SIOH
After noting that Opco would be deemed by ss. 148(7) and (9) to receive proceeds of disposition equal to the Policy's CSV rather than FMV, CRA stated:
[T]he safe-income determination time for the Dividend-in-Kind… is the time that is immediately before the time that the Dividend-in-Kind is paid to Holdco. Because the income inclusion resulting from the disposition of Opco's interest in the Policy…will be added to Opco's safe income after the Dividend-in-Kind is paid to Holdco, it will not contribute to the capital gain that could be realized on a disposition at fair market value of an Opco share immediately before the time the Dividend-in-Kind is paid.
Effect of non-deductible policy premium on SIOH
After noting that "premiums payable by a taxpayer under a life insurance policy are generally considered to be on account of capital" and referencing "the payment of premiums on the Policy over the period throughout which Opco was a private corporation," CRA stated:
The portion of such premiums that contributes to the increase of the cash surrender value of the Policy would be considered to be on hand at the safe income determination time to the extent that it contributes to the accrued capital gain on a share of the capital stock of Opco at that time. … However, the portion of such premiums that does not contribute to the increase of the cash surrender value of the Policy at that time will not be on hand at the safe income determination time and would therefore reduce the amount of safe income that could reasonably be considered to contribute, immediately before the Dividend-in-Kind, to the accrued capital gain on the Opco shares on which that dividend is received.