Principal Issues: 1. In the context of creditor's group life insurance policies, whether the death benefit added to the corporate debtor's capital dividend account is reduced by any adjusted cost basis? 2. Whether we are prepared to apply the Federal Court of Appeal's decision in Innovative to situations involving an individual life insurance policy taken by a corporate debtor, the creditor financial institution being the irrevocable beneficiary under the policy?
Position: 1. In circumstances involving this particular type of "pure" insurance product, the CRA is prepared to accept that the full amount of the death benefit be added to the corporate debtor's capital dividend account, without a reduction by the adjusted cost basis. 2. Possibly, depending on the legal relationships between the parties.
Reasons: 1. Characteristics of the type of product described. 2. We will apply the decision if the corporate debtor is able to demonstrate that the proceeds of the life insurance policy were paid directly to the financial institution and the institution reduced the debt of the corporation under contract between the corporation and the institution.
Financial Strategies and Financial Instruments Roundtable, 5 October 2012
2017 APFF Conference
Question 19 Loan Insurance and Capital Dividend Account
Group Insurance Policy
Since the decision of the Federal Court of Appeal in The Queen v. Innovative Installation (footnote 1), and in factual situations similar to this case, the CRA indicated that it was changing its position, to the extent that the other conditions set out in the definition of "capital dividend account" (" CDA ") in subsection 89(1) are satisfied, so that a corporation can account for life insurance proceeds in the calculation of its CDA balance.
Question to the CRA
In this context, since the coverage was underwritten through a group life insurance policy, and the debtor corporation has no interest in this policy, not being a subscriber to it, can you confirm that the full amount of the death benefit, without regard to the policy’s adjusted cost basis ("ACB"), can be credited to the corporation’s CDA?
Individual Insurance Policy
Where an individual policy for loan insurance is purchased by a borrowing corporation, it is customary for the lending institution to require an irrevocable beneficiary designation in its favour, in addition to a movable hypothec. In the event of the death of the insured, only the portion of the death benefit equivalent to the balance of the loan is paid to the lender, with the ultimate excess being returned to the borrowing corporation.
In applying the same case law principle of the Innovative case, it could be considered that the borrowing corporation was the true beneficiary and the crediting to its own CDA of the excess of the entire death benefit over the ACB of the policy could be contemplated.
Question to the CRA
As part of your new administrative position, do you plan to amend your Interpretation Bulletin IT-430R3 (Consolidated), Life Insurance Proceeds Received by a Private Corporation or a Partnership as a Consequence of Death, so as to clarify this situation regarding gain crediting to the CDA of a corporation?
CRA Response
Creditor Group Insurance Policy
At first glance, the CRA is generally of the view that the purchaser of a group life insurance policy has an interest in a life insurance policy, even though it is not the policyholder of the life insurance policy contract.
That being said, the CRA has already indicated that the decision of the Federal Court of Appeal in Innovative will be applied in factual situations similar or identical to those in this case. This case involved a group creditor life insurance policy in which the creditor (a financial institution) was the beneficiary under the policy. At the time of the insured's death, the creditor applied the life insurance proceeds against the outstanding balance of the debtor corporation's loan in accordance with its contractual obligations.
We understand that creditor life insurance policies are generally "pure" life insurance products, that is, they are generally term life insurance products with no investment aspect [“sans participation”] and no cash surrender value, being typically designed to pay the balance of a loan in the event of the death of the person whose life is insured. In addition, we understand that the premiums payable in respect of a particular debtor for this type of product are generally calculated to cover the cost of insurance for the term of the insurance coverage, being the term of the loan. As a result, we understand that if an ACB calculation were done for each purchaser, the result would generally be a small amount or nil.
In such circumstances, the CRA is prepared to accept that the full amount of the proceeds of the life insurance policy be included in the calculation of the CDA of the debtor company, without any reduction in the ACB. However, our reasoning is based on the characteristics of the type of product described above. Consequently, this position would not apply in the context of another type of life insurance product.
Individual Insurance Policy
The CRA has indicated in the past that it would apply the position adopted by the Federal Court of Appeal in the Innovative case in similar or identical fact situations. Consequently, in a situation where a corporation can demonstrate that proceeds of a life insurance policy which were paid directly to a financial institution reduced the balance of the loan owing by the corporation to the financial institution, the life insurance proceeds will be considered as "received" by that corporation for the purposes of subparagraph (d)(ii) of the CDA definition in subsection 89(1).
In Innovative, the type of insurance policy was a group creditor life insurance policy and not an individual life insurance policy. The situation you described therefore has important distinctions from the situation examined by the Federal Court of Appeal in that case. That being so, and although a definitive answer would require the analysis of all documents establishing the rights and obligations of the parties, we are of the view that it would be reasonable to apply the same position in such circumstances, provided that the borrowing corporation is able to demonstrate that the proceeds of the life insurance policy paid directly to the lending financial institution reduced the loan balance owing by the borrowing corporation to the financial institution, in accordance with existing contractual relationships between the parties.
In such a situation, any ACB of the borrowing corporation, being the holder of the life insurance policy, would reduce the amount that could be added to its CDA, where applicable.
The comments appearing in paragraph 6 of Interpretation Bulletin IT-430R3 (Consolidated) will be modified accordingly.
Mélanie Beaulieu
(613) 957-9226
2012-045323
FOOTNOTES
Due to our system requirements, footnotes contained in the original document are reproduced below:
1 2010 FCA 285 ("Innovative").