A. Cameron (613) 957-2121
Dear Sirs:
Re: The disposition of corporate-owned life insurance
We apologize for the delay in responding to your letter of February 24, 1986 in which you requested our opinion as to whether or not the provisions of section 15 of the Income Tax Act (the "Act") would have application in the following hypothetical situation:
- Corporation A purchases $100,000 of corporate life insurance on the life of a key executive who may also be a shareholder of the corporation and perhaps even the only shareholder of the corporation.
- The insurance policy provides for no cash surrender value in respect of the policy until and unless the policy is maintained in effect for the full term of fifteen years. The corporation maintains insurance through the payment of premiums during the first thirteen years of the policy.
- At the beginning of the fourteenth year the policy is made available to the employee on condition that he assume full responsibility for all future premium payments.
- The justification for transferring the policy to the employee's name might relate to his resignation from services in the company, the elimination of conditions in respect of corporate bank loans or changes in a shareholder agreement.
- Upon paying the fifteenth year payment the employee becomes entitled to the cash surrender value of the policy which may at that point have reached $40,000, or approximately 40% of its face value. Otherwise he might keep the policy without making further premium payments, and receive an endowment at a later date.
You have also asked what the effect would be if the terms of the initial insurance contract gave the employee or shareholder the right to assume responsibility and ownership of the insurance contract at any time or perhaps at any time after the policy had been in effect for a certain number of years.
The determination of whether or not a benefit which is taxable under the Act has been conferred on an individual in a given situation, as well as the possible amount thereof and the capacity in which it would be received, are all questions of fact which can only be resolved based upon a review of all the facts of a particular situation. Generally, however, paragraphs 6(1)(a} and 15(1)(c) of the Act will operate to bring into the income of, respectively, an employee or shareholder the amount by which the fair market value of the life insurance policy at the time of transfer exceeds any amount paid by the transferee for that policy. It should be noted that the fair market value of the life insurance policy may or may not be equal to its "value" as defined by paragraph 148(9)(g) of the Act. Factors which may affect this fair market value, in addition to any cash surrender value of the policy, would include accumulated dividends and interest on the policy, special rights contained in the policy or the fact that the policy is assigned or transferred to an employee or shareholder at a time when it is known the death of that person is imminent.
In our opinion, at the time that a term is inserted in the life insurance contract whereby the employee or shareholder would have the right to assume responsibility and ownership of the policy a benefit may have been conferred upon this person which is taxable at that time. The value of such benefit would be a question of fact.
We hope our comments are of assistance to you.
Yours truly,
for Director Reorganizations and Non-Resident Division Specialty Rulings Directorate Legislative and Intergovernmental Affairs Branch