2021-0884301C6 2021 CLHIA Roundtable - Q5 - Life insurance shares

Principal Issues: We were asked to confirm the CRA's position described in document 2005-0138361C6 regarding the allocation of the cash surrender value (CSV) of a life insurance policy for the purpose of determining the fair market value of property (shares) deemed to have been disposed as a consequence of death in accordance with subsection 70(5.3).

Position: Our position with respect to the allocation of the CSV for purposes of subsection 70(5.3) remains unchanged.

Reasons: Consultation with Business Equity Valuations Section in CPB.

Author: Danis, Sylvie
Section: 70(5.3)

CLHIA Roundtable – May 2021

Question 5 – Life insurance shares

Background

At the APFF 2005 Conference, CRA was asked to comment on a particular situation. See situation B in CRA document no. 2005-0138361C6, dated October 7, 2005. The question, as translated, was presented as follows:

A shareholder wants the proceeds of an insurance policy on his life, held by a corporation of which he is the sole shareholder, be paid to one person in particular, for example a former spouse.

To this end, the Corporation creates a special category of non-voting, non-participating shares, redeemable for $1 at the discretion of the Corporation (“special share”). These shares entitle the holder to receive a dividend equal to the proceeds of the life insurance received by the corporation when the sole shareholder dies. The only other category of shares issued by the corporation consists of common shares held 100% by the sole shareholder.

In situation B, the sole shareholder acquires a special share for $1. Subsequently, the corporation underwrites an insurance contract on the shareholder's life. The corporation is the policyholder, pays the premiums and is the beneficiary. At the time of his death, the shareholder holds all of the common shares and the special share. At this point, moreover, the insurance contract has cash surrender value.

In document 2005-0138361C6, the CRA was asked whether, pursuant to subsection 70(5.3) of the ITA, the cash surrender value of the insurance contract will be taken into account in evaluating the fair market value of the common shares or the special share.

The CRA provided the following response:

Subsection 70(5.3) of the ITA does not specify how to distribute the cash surrender value of a life insurance policy between different categories of shares. Generally, we are of the opinion that it would be reasonable to distribute the cash surrender value of a life insurance policy between the different categories of shares based on the rights and conditions attached to them, in the same way as the overall value of a business is distributed between the different categories of shares in circulation. To be able to answer the question definitively, it would be necessary to obtain a description of all the rights and conditions attached to the different categories of shares of the corporation. Subject to obtaining additional information, it appears that the overall value of the corporation that would be attributed to the special share immediately before the death would be nominal. Accordingly, the value of the common shares immediately before the death would take into account almost the entire cash surrender value of the life insurance policy.

Question
Can the CRA confirm that the comments above continue to apply under this particular fact pattern?

CRA Response

The comments provided at the APFF 2005 Conference, described above, continue to apply to that identical fact situation.

However, please note that the purpose of this question was to obtain the CRA’s views on whether in applying subsection 70(5.3), immediately before the taxpayer’s death, the cash surrender value of the life insurance policy would be taken into account in determining the fair market value of the common shares or the fair market value of the special/insurance share and our comments at that time were limited to this narrow aspect of the question. Consequently, and given that the facts outlined in this question only summarize very briefly a hypothetical situation, the above comments should not, in any manner, be interpreted as being applicable to other tax consequences that may arise in a given situation and should not be construed as implying that the CRA has confirmed, reviewed or made any determination in respect of any other tax consequences that may arise in a given situation. 

The portion of the response confirming the 2005 position was prepared with the collaboration of the Business Equity Valuations Section
Tax Avoidance Division
Compliance Programs Branch

Sylvie Danis
May 19, 2021
2021-088430

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