2021-0882441E5 Life insurance Parentco/Subco arrangements

Principal Issues: In light of the 2016 legislative amendments to paragraph (d) of the definition of "capital dividend account" in subsection 89(1), can we confirm the CRA's position regarding the applicability of subsections 246(1), 56(2), section 9, or paragraph 12(1)(x) to a life insurance arrangement involving a Parentco as the policyholder and a Subco as the beneficiary (either revocable or irrevocable).

Position: Prior positions remain unchanged. We are unable to provide any further comments on the applicability of the aforementioned provisions to the limited circumstances described.

Reasons: The determination of whether these provisions apply to a particular arrangement is a question of fact that can only be ascertained on a case-by-case basis following a review of all the facts and circumstances of the particular arrangement.

Author: Estabrooks, Karri Lea
Section: 9; 12(1)(x); 15(1); 56(2); 246(1)

XXXXXXXXXX
                                                                                       2021-088244
                                                                                       Karri Lea Estabrooks

September 28, 2022

Dear XXXXXXXXXX:

Subject: Taxable Benefits – Parentco Owner/Subco Beneficiary of a Life Insurance Policy

We are writing in response to your correspondence dated February 24, 2021, wherein you requested our comments regarding the application of certain taxable benefit provisions in the Income Tax Act (Canada) (the “Act”) as they apply to various life insurance policy ownership/beneficiary arrangements. We apologize for the delay of our response.

Background

Your correspondence refers to previously published CRA views regarding life insurance policy arrangements. Specifically, mentioned in your correspondence, are documents 2009-0347291C6 and 2009-0329911C6. Each of these documents describe a situation where one private corporation, Subco, is the sole owner and premium payor of a life insurance policy and another corporation, Parentco, the sole shareholder of Subco, is the beneficiary of the policy. We opined that Subco was impoverished by paying the life insurance premiums under the policy and Parentco was enriched by being the named beneficiary. As a result, subsection 15(1) of the Act would apply, such that Parentco, in computing its income for the year, would have to include the amount of the benefit conferred on it by Subco.

Your correspondence also referred to document 2010-0359421C6 which considered the tax consequences arising from different insurance ownership and beneficiary arrangements involving a Parentco and a Subco. In the first situation described in document 2010-0359421C6, Parentco is the sole owner and premium payor of the policy and Subco is designated as the revocable beneficiary of the policy. Although we opined that this arrangement did not result in a taxable shareholder benefit to Parentco under subsection 15(1) of the Act, we opined that subsection 246(1) of the Act could apply to Subco.

In the second situation described in the document, Parentco is the sole owner and premium payor of a life insurance policy and Subco is designated as the irrevocable beneficiary. Subco reimburses Parentco for the insurance premiums paid by Parentco that represents the charge or amount that should be paid by Subco. We commented that subsection 15(1) of the Act would not generally be applicable to Parentco in this situation where the reimbursement is included in Parent Co’s income.

Lastly, your correspondence referred to the 2016 legislative amendment to paragraph (d) of the definition of “capital dividend account” (CDA) in subsection 89(1) of the Act that, in general terms, reduces the proceeds of a life insurance policy received as a consequence of the death of an insured person (death benefit) by the “adjusted cost basis” of a policyholder’s interest in the life insurance policy immediately before the death (regardless of whether the recipient of the death benefit is a policyholder of the policy).

Question

You have asked whether subsections 246(1) or 56(2), section 9 or paragraph 12(1)(x) of the Act apply to the following Parentco/Subco arrangements in light of the 2016 amendments to the CDA definition:

a) Parentco is the sole owner and premium payor of a life insurance policy and Subco is designated as the revocable beneficiary of the policy.

b) Parentco is the sole owner and premium payor of a life insurance policy and Subco is designated as the irrevocable beneficiary. Subco further reimburses Parentco for the insurance premiums paid by Parentco.

Our Comments

This technical interpretation provides general comments about the provisions of the Income Tax Act (the Act) and related legislation (where referenced). It does not confirm the income tax treatment of a particular situation involving a specific taxpayer but is intended to assist you in making that determination. The income tax treatment of particular transactions proposed by a specific taxpayer will only be confirmed by this Directorate in the context of an advance income tax ruling request submitted in the manner set out in Information Circular IC 70-6R12, Advance Income Tax Rulings and Technical Interpretations.

The views we expressed in the documents referenced above remain unchanged. It should be noted that, in the recent decision, Harding v. The Queen (2022 TCC 3), the Tax Court of Canada found that a benefit under subsection 15(1) of the Act was conferred when a corporation paid the premiums on corporate-owned life insurance policies insuring the life of the corporation’s sole shareholder and his spouse and all of which named the spouse or the shareholder’s stepchildren as beneficiaries.

Given the broad scope of each of the provisions, we are unable to provide any further comments regarding the applicability of the provisions referred to in your question, to the limited Parentco/Subco situations described above. Accordingly, any determination of whether section 9, paragraph 12(1)(x), subsection 56(2) or 246(1) of the Act apply to a particular Parentco/Subco arrangement involving life insurance policies can only be ascertained, on a case-by-case basis, after a comprehensive review and analysis of the relevant facts and agreements amongst the parties (including any valuation considerations, as applicable). Such a review would normally be undertaken only in the course of a compliance review of the particular arrangement or, where the arrangement involves proposed transactions that fall within the scope of Information Circular, IC 70-6R12, an advance income tax ruling request.

In addition, any determination of whether the aforementioned provisions apply to a particular Parentco/Subco life insurance arrangement is considered independently of any impact of the life insurance arrangement has on a corporation’s CDA.

We trust that these comments will be of assistance.

Yours truly,

Bob Naufal
Manager
Financial Institutions Section
for Director
Financial Industries and Trusts Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch

All rights reserved. Permission is granted to electronically copy and to print in hard copy for internal use only. No part of this information may be reproduced, modified, transmitted or redistributed in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, or stored in a retrieval system for any purpose other than noted above (including sales), without the prior written permission of Canada Revenue Agency, Ottawa, Ontario K1A 0L5.

© Her Majesty the Queen in Right of Canada, 2022

Tous droits réservés. Il est permis de copier sous forme électronique ou d'imprimer pour un usage interne seulement. Toutefois, il est interdit de reproduire, de modifier, de transmettre ou de redistribuer de l'information, sous quelque forme ou par quelque moyen que ce soit, de façon électronique, mécanique, photocopies ou autre, ou par stockage dans des systèmes d'extraction ou pour tout usage autre que ceux susmentionnés (incluant pour fin commerciale), sans l'autorisation écrite préalable de l'Agence du revenu du Canada, Ottawa, Ontario K1A 0L5.

© Sa Majesté la Reine du Chef du Canada, 2022