V.A. Sider (613) 993-6937
MAR 13 1985
Dear XXXX
Re: Life Insurance Capital Dividend Account
In your letter of December 17, 1984 you requested our interpretation of the definition of life insurance capital dividend account as found in paragraph 89(1)(b.2) of the Income Tax Act.
In general terms your question was whether proceeds of a life insurance policy received by a trust and subsequently distributed to a corporate beneficiary could be considered to be proceeds of a life insurance policy received by the corporation. You have asked us to assume that the trust is the owner and beneficiary of the policy, but that the corporation reimburses the trust for the policy premiums and the trust is obligated to distribute any proceeds from the policy to the corporation. This situation could arise, for example, when two corporations, which each own 50% of the shares of an operating company, have a buy/sell agreement providing that on the death of the shareholder of one of the corporations the other corporation would be required to buy the shares of the operating company not already owned by it. The trust would be used to hold the life insurance that is used to fund the buy/sell agreement. The corporations would share the cost of the policies (one policy on the life of the shareholder of each of the corporations) by reimbursing the trust for the premium costs, and the trust would distribute any policy proceeds to the corporation owned by the surviving shareholder.
In our opinion distributions from a trust of life insurance proceeds would not be credited to the life insurance capital dividend account of a corporate recipient because they would not represent proceeds of a life insurance policy received by the corporation. Such distri- butions would represent distributions of property in satisfaction of an interest, or partial interest, in a trust and would not retain their nature for tax purposes without specific legislation to that effect.
Yours truly,
for Director Bilingual Services & Finance Division Corporate Rulings Directorate Legislation Branch