2022-0928851C6 2022 CALU Roundtable - Q7 - Life insurance shares

Principal Issues: Whether an arrangement involving life insurance shares could result in the application of the shareholder benefit rules in subsection 15(1) or the application of the benefit provisions in subsections 56(2) or 246(1).

Position: General comments provided.

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 arrangement.

Author: Danis, Sylvie
Section: 15(1), 56(2), 246(1)

CALU Roundtable - May 2022

Question 7 – Life insurance shares

Background

The CRA has previously considered life insurance shares in the context of determining how the cash surrender value (CSV) of a corporate-owned life insurance policy is allocated between various classes of shares including life insurance shares, for the purposes of subsection 70(5.3) of the Income Tax Act (the “Act”) on the death of a shareholder.

CRA’s technical interpretations 2021-0884291C6 and 2021-0884301C6 did not discuss the issue of whether there was the potential for a taxable benefit being assessed to any shareholder of the corporation upon the issuance of the life insurance shares. Potential taxable benefits might arise under subsections 15(1), 56(2) or 246(1) of the Act.

Subject to certain exceptions, subsection 15(1) of the Act requires the amount or value of any benefit that is conferred on a shareholder (or on a person in contemplation of the person becoming a shareholder), by a corporation to be included in the shareholder’s income for a taxation year. The CRA stated in technical interpretation 2010-0359421C6 that generally, subsection 15(1) of the Act would be applicable where a transaction or a series of transactions gives rise to an impoverishment of the corporation and an enrichment of the shareholder.

In general terms, subsection 56(2) of the Act requires a taxpayer to include in income a payment or transfer of property made to another person pursuant to the direction of, or with the concurrence of, the taxpayer, or as a benefit that the taxpayer desired to have conferred on that other person, to the extent the payment or transfer would have been included if paid or transferred directly to the taxpayer.

In general terms, subsection 246(1) of the Act requires a taxpayer to include in income the amount of a benefit conferred on the taxpayer, directly or indirectly, in any manner whatever by another person, to the extent that the benefit is not otherwise included in the taxpayer's income, if the amount would have been included in the taxpayer’s income if paid directly to the taxpayer.

In somewhat similar circumstances to the 2021 technical interpretations mentioned above, the CRA was asked about issuing discretionary dividend shares for nominal consideration. The CRA indicated in technical interpretation 2016-0626781E5 that a shareholder benefit under subsection 15(1) of the Act may arise on the issuance of preferred shares, or that an existing common shareholder may be seen to have disposed of a right, interest, or right to dividends to the acquirer of the preferred shares.

Fact Situation

A currently owns all the outstanding shares in Opco, a Canadian controlled private corporation. A has two children, B who is involved with the business, and C who is not involved with the business. It is A’s intention that B will eventually assume control of Opco. A would like to ensure that C is fairly treated under the estate. A is therefore considering undertaking an estate freeze in which Opco would issue to C a life insurance share that is redeemable and retractable for $1 prior to the death of A, and that entitles the holder to a dividend equal to the death benefit on a life insurance policy to be acquired on A’s life (which policy would be owned and funded by Opco as the beneficiary of the policy). Opco would also be obligated under the terms of the life insurance share issued to C to elect that the dividend paid to C be treated as a capital dividend to the extent of the credit to the capital dividend account arising from the receipt of the life insurance proceeds by Opco.

Alternatively, in lieu of implementing an estate freeze, A would cause Opco to issue to C, a life insurance share with the same share attributes described above. Opco would subsequently acquire a life insurance policy on A’s life (which policy would be owned and funded by Opco as the beneficiary of the policy).

Question

Can the CRA confirm that subsections 15(1), 56(2) or 246(1) of the Act do not apply on the facts described above?

Response

Given the broad scope of these provisions, whether any of subsections 15(1), 56(2) or 246(1) of the Act apply in respect of a particular tax planning arrangement (including those that involve life insurance policies and/or life insurance shares) 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), as well as the objective of the tax planning and the intent of the parties (express or implied) in respect of the arrangement. 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, an advance income tax ruling request.

Sylvie Danis
2022-092885
May 3, 2022

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