November 20, 1981
TO: REGINA DISTRICT OFFICE Attention: Mr. L. Serdachny, Basic Files
FROM: HEAD OFFICE Corporate Rulings Directorate J.G. Luck 593-6937
RE: Deductibility of Directors and Officers Liability Insurance Premiums
This is in reply to your letter dated August 28, 1981 wherein you requested our opinion on the deductibility of the above-noted insurance premium and our opinion on the tax consequences of insurance proceeds received under the terms of that policy.
We have reviewed the copy of the insurance policy that you submitted with your request. Under the terms of the policy, the insurer agrees to pay on behalf of the Directors and Officers, all losses which the Directors and Officers become legally obliged to pay (except for such losses which the Company Indemnifies the Directors and Officers) that arise as a result of any claim or claims that are made against them for a Wrongful Act (as defined in the policy). In addition, the insurer will pay on behalf of the Company certain amounts that the Company will indemnify the Directors and Officers. Under the provisions of the policy, a Wrongful Act is defined as follows:
Wrongful Act shall mean any actual or alleged error or misstatement or misleading statement or act or omission or neglect or breach of duty by the Directors or Officers in the discharge of their duties, individually or collectively, or any other matter not excluded by the terms and conditions of this policy, claimed against them solely by reason of their being Directors or Officers of the Company.
It is our view that the premiums paid by XXXX under this policy are deductible expenditures since it is reasonable to conclude that such amounts are reasonable business expenses. We would suspect that without such indemnification for its Directors and Officers, a company (in particular, a large one) would not be able to attract such officers. Whether or not the full deduction should be allowed in 1977 or be allocated over the 3-year period covered by the policy, depends on the method regularly followed by the company in deducting for income tax purposes all of its insurance premiums.
We are unable to provide a general opinion on the taxability of payments pursuant to the above-noted policy. Whether or not a particular payment is taxable, non-taxable, or a reimbursement of a tax deductible expenditure (in which case the receipt would reduce the claim for the expenditure) is a question of fact that can only be determined once the nature of the particular payment is known.
Chief Finance, Insurance & Leasing Section Specialty Corporations Rulings Division Corporate Rulings Directorate Legislation Branch