| 5-920804 | |
| 24(1) | M. Séguin |
| (613) 957-8953 |
Attention: 19(1)
June 30, 1992
Dear 19(1)
This is in reply to your letter of March 10, 1992 wherein you ask for our opinion regarding the tax treatment of the following fact situation:
24(1)24(1)
Your questions
- What is the tax treament of the insurance proceeds when received by OPCO?
- Are the premiums tax deductible?
- Does OPCO have the option of deducting the premiums and if it chooses not to deduct the premiums, does that affect the answer to question one above?
- If Mr. X or Mr. Y becomes disabled and a payment is made pursuant to this disability insurance contract, will the capital dividend account of OPCO be credited by an amount with respect to the disposition of this policy? If so, by how much?
- In the event of a disability and a retraction of shares, will subsection 55(2) of the Income Tax Act (the "Act") automatically apply so as to transform a portion of the deemed dividend into a capital gain assuming that the deemed dividend is greater than the safe income attributable to the retracted shares?
- What effect will the proceeds of the disability policy have on the safe income determination?
Commentary
Since your inquiry seems to relate to a factual situation, we cannot provide you with an opinion otherwise than by way of an advance income tax ruling. An advance income tax ruling may be provided in accordance with Information Circular 70-6R2 dated September 28, 1990, in respect of the proposed transactions. As mentioned in paragraph 21 of the Information Circular, the District Taxation Offices consider requests for written opinions on completed transactions. While it is not possible to provide you with a definitive opinion on your particular situation, we can provide the following general comments.
We are of the opinion that, when a corporation subscribes to a disability insurance policy under a shareholder's agreement, the premiums paid by the corporation are not admissible business expenses and consequently not deductible for tax purposes. The corporation, therefore, does not have the option in deducting these amounts. In addition, any amount received by the corporation under that policy in respect of a disability of a shareholder is not taxable income of the corporation.
Also, we are of the opinion that a payment made pursuant to a disability insurance contract will not be added to the capital dividend account of a corporation under paragraph 89(1)(b) of the Act.
In a situation such as you have presented, the assumptions that you have made including the assumption that the shareholders are not related, if one of the results of a redemption of shares was to effect a significant reduction in the portion of the capital gain that, but for the dividend, would have been realized on a disposition at fair market value of the shares immediately before the dividend, subsection 55(2) of the Act will automatically apply since the exceptions under paragraph 55(3)(a) of the Act do not apply. Finally, the proceeds from a disability insurance policy will not be considered in the determination of the safe income of a corporation.
Yours truly,
for the DirectorReorganizations and foreign DivisionSpecialty Rulings Directorate Legislative and Intergovernmental Affairs Branch