XXXXXXXXXX
Attention: XXXXXXXXXX
Dear Sirs:
RE: Indemnification of Directors and Officers
This is in reply to your letter of November 19, 1992 concerning the indemnification of an individual for certain claims made against him or her.
Your concerns relate to indemnification made in respect of an individual in relation to his or her capacity as an officer, director, or an officer and director of a corporation. In relation to such an individual, you have asked us whether a benefit would be included in his or her income under section 5 or 6 of the Income Tax Act (the Act) where an amount is paid by a taxable Canadian corporation or its insurance carrier pursuant to the terms of a directors' and officers' liability insurance policy in respect of a legal action brought against the individual. You have also asked us to assume that the costs incurred by the company or the insurance carrier would be within the scope of section 124 of the Canada Business Corporations Act (CBCA).
Our Comments:
The comments set out below are of a general nature and should not be construed as relating to the circumstances of a particular taxpayer. We also note that in the following comments, the "individual" is either an officer, director or an officer and director of a corporation.
Subsections 124(1), (2) and (3) of the CBCA refer to indemnification by a corporation while subsection 124(4) of the CBCA refers to director's and officer's liability insurance. It is our general view that a reimbursement of an individual's costs incurred in the circumstances described in subsections 124(1), (2), or (3) of the CBCA would not constitute a taxable benefit to the individual.
Where the risks covered by a liability insurance policy are limited to those set out in subsection 124(4) of the CBCA, neither the premiums paid in respect of such insurance nor any proceeds which may become receivable under such a policy will be considered a taxable benefit to the individual. In our view, the assumption by the corporation of an individual's personal liability for corporate actions would also not create a taxable benefit for the individual provided that such indemnification is limited to that which is permitted under section 124 of the CBCA.
As a final comment, we wish to note that it is a question of fact whether an insurance policy or a reimbursement is described in the relevant corporate law. Of course, if the facts of a particular case were to indicate otherwise, the above comments would not be applicable.
The above comments represent our opinions of the law as it applies generally. As indicated in paragraph 21 of Information Circular 70- 6R2, these opinions do not constitute an advance income tax ruling and are not binding on the Department.
We trust that our comments will be of assistance to you.
Yours truly,
P.D. Fuoco for DirectorBusiness and General DivisionRulings DirectorateLegislative and Intergovernmental Affairs Branch