September 2012

In technical interpretation # 2012-0446491E5 dated July 25, 2012, the CRA confirmed the basics of corporate-owned life insurance: life insurance death benefits received by a corporation are tax free and credit the corporation’s capital dividend account (CDA) in excess of the policy’s adjusted cost basis (ACB) which can be distributed to shareholders as a tax-free capital dividend.

The fact pattern of the particular question involved an Opco that owned and was the beneficiary under joint first-to-die life insurance on Mr. and Mrs. A. Mr. A owned 100% of the voting shares of Opco and 100% of the voting shares of Holdco. Mrs. A owned 100% of the preferred shares of Holdco and Holdco in turn owned 100% of the preferred shares of Opco.

The CRA confirmed that the fact that Mrs. A’s life is insured under the policy did not affect the tax treatment of the receipt of the death benefit.  

The CRA also confirmed that there was no shareholder benefit conferred by Opco paying the premium under the policy. Not surprisingly, the CRA stated, while always a question of fact, “where a corporation is both the policyholder and the sole beneficiary of a life insurance policy on the life of a shareholder (in this case presumably, Mrs. A indirectly), and the corporation pays the premiums with respect to such policy, it is our view that the payment of the premiums on such a policy would not ordinarily constitute a taxable benefit to the shareholder under subsection 15(1) of the Act.”

Not necessarily rocket science, but nice to hear again.

The Tax, Retirement & Estate Planning Services at Manulife Financial writes various publications on an ongoing basis. This team of accountants, lawyers and insurance professionals provides specialized information about legal issues, accounting and life insurance and their link to complex tax and estate planning solutions.

These publications are distributed on the understanding that Manulife Financial is not engaged in rendering legal, accounting or other professional advice. If legal or other expert assistance is required, the service of a competent professional should be sought.

These columns are current as of the time of writing, but are not updated for subsequent changes in legislation unless specifically noted.

This information is for Advisor use only. It is not intended for clients. This document is protected by copyright. Reproduction is prohibited without Manulife’s written permission.