Question
Private corporations sometimes acquire life insurance policies to provide funds in the event of a significant shareholder’s death. A situation similar to the following is often encountered. An individual shareholder (A) holds 100 percent of the voting shares of a given corporation (Parentco). Parentco holds 100 percent of the voting shares of another corporation (Subco). Subco is the holder of a life insurance policy on the life of A and pays the premiums relating thereto. The beneficiary of the life insurance policy is Parentco.
Can the CRA confirm that subsection 15(1) would not apply to the situation described above, as indicated in CRA documents nos. 2004‑0065461C6 and 9824645?[Footnote 8]
Response
The question of whether a corporation has conferred a benefit on a shareholder for the purposes of subsection 15(1) is generally one of fact.
Generally speaking, the CRA considers that subsection 15(1) applies where a transaction or a series of transactions gives rise to an impoverishment of the corporation and an enrichment of the shareholder. In Del Grande v. The Queen,[Footnote 9] the court stated the following:
“Paragraph 15(1)(c) contemplates the conferral of a genuine economic benefit upon the shareholder. The word “confer” implies the bestowal of bounty or largesse, to the economic benefit of the conferee and a corresponding economic detriment of the corporation.”
We are of the view that Subco would have conferred a benefit on its shareholder, Parentco, in paying the premiums relating to the life insurance policy of which Parentco is the beneficiary. As a result, subsection 15(1) 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. This amount would generally be included as income from property.
This interpretation represents a change of position from what was stated in document nos. 2004‑0065461C6 and 9824645 and will apply as of the 2010 calendar year. In cases of life insurance policies already issued, the amount of the benefit conferred will be included in the shareholder’s income as of the 2011 calendar year.
Also, as stated in document no. 9824645, subsection 245(2) could, depending on the circumstances, apply to adjust the calculation of the amount to be included by Parentco in its capital dividend account upon receipt of the proceeds of the life insurance policy.