CALU PRACTICE NOTES
Corporate-owned Insurance
September 2016
Shareholder Borrowing
Introduction
An exempt life insurance policy offers a number of important financial benefits. It not only provides a tax-free
payment on the death of the life insured, but also permits the cash accumulations within a permanent life insurance
policy to grow on a tax-deferred basis. As well, depending on the type of policy, the cash accumulations can provide
an additional tax-fee payment upon the death of the life insured.
Situations can arise where the policyholder needs to access the cash accumulation within the life insurance policy
prior to death. There are a variety of ways of doing this, some of which can result in a disposition of an interest
in the policy and tax reporting.1 However, it is possible to indirectly access the cash value of an insurance policy
through a collateral loan arrangement, with the loan being advanced by the life insurance company or another
lender. A loan secured by the life insurance policy is not considered a disposition of an interest in the policy for tax
purposes, and therefore does not trigger tax reporting of any accumulated gains within the policy.2
The purpose of this practice note is to highlight the tax and non-tax issues to be considered when a corporateowned life insurance (COLI) policy is assigned as collateral security for borrowings by an individual shareholder. The
following fact pattern will be used to demonstrate the various issues and concerns that may arise. Please note that
most of the issues highlighted below apply to both participating and univeral life (UL) policies, and to “front-end”
and “back-end” leverage arrangements.3
Fact Situation Under Consideration
Ms. Smith, age 50, owns all of the shares in Holdco, which in turn owns voting preference shares in Opco with
a fair market value (FMV) of $3 million and a $800,000 adjusted cost base (resulting from an estate freeze and
capital gains crystallization).
Holdco and Opco are “connected” for purposes of the Act.4
Holdco owns a $2 million UL policy on Ms. Smith’s life – the UL policy has a cash surrender value of $500,000 and
an adjusted cost basis (ACB) of $300,000.
Opco is the beneficiary of the life insurance policy and, on the death of Ms. Smith, the insurance proceeds will be
used to redeem from Holdco a portion of the Opco preference shares as part of a business succession arrangement within her family.
Opco pays regular dividends to Holdco sufficient to fund the annual cost of insurance charges under the UL
policy.
Opco also makes additional dividend payments to Holdco, which vary based on the profitability of the business,
that are used to make extra deposits to the UL policy.
Ms. Smith currently requires $250,000 for an investment and her bank is prepared to lend the required funds
provided the life insurance policy owned by Holdco is assigned to the bank as collateral security.
The bank has also agreed to lend additional funds to Ms. Smith, secured by the cash value of the UL policy
owned by Holdco, provided the total borrowings do not exceed 60% of the policy’s cash value – if this limit is
reached, additional security must be provided or the excess portion of the loan must be repaid. As well, the
terms of the loan require repayment upon Ms. Smith’s death.
Considerations While Ms. Smith is Alive
Dividend Tax Treatment
The payment of taxable dividends by Opco to Holdco to fund the cost of insurance charges should be deductible
from Holdco’s income.5 As well, since Holdco and Opco are “connected” for purposes of the Act, there will be no
Part IV refundable tax6 payable by Holdco on the dividends received provided Opco does not receive a dividend
refund in respect of the payment of those dividends.7 Similar tax treatment would normally apply to those
dividends paid to Holdco that are used to fund additional deposits to the insurance policy. However, such dividend
payments may be subject to the application of subsection 55(2) of the Act. If subsection 55(2) applies to a dividend
payment, it will be deemed to be a capital gain from the disposition of a capital property, unless there is sufficient
“safe income” allocated to the Opco preference shares to cover the dividend payment.8 Should subsection
55(2) apply to the dividends, this will significantly increase the tax cost to Holdco in receiving the dividends and
presumably reduce the extra contributions to the UL policy.
10/8 Policy Definition
When borrowing against a life insurance policy, the rules applicable to 10/8 policies9 must be considered. A 10/8
policy means a life insurance policy that is assigned for a borrowing or a policy loan under the terms of the policy,
where either: (a) the rate of return credited to an investment account under the policy is determined by reference
to the rate of interest on the borrowing or policy loan, and such rate of return would not be credited to the account
if the borrowing or policy loan was not in existence; or (b) the maximum amount of an investment account in
respect of the policy is determined by reference to the amount of the borrowing or policy loan.
It should be noted that the 10/8 policy rules apply whether the collateral loan is advanced by the life insurance
company or another lender. It is therefore possible for an insurance policy to be treated as a 10/8 policy where the
loan is advanced by a bank, if the conditions set out in the 10/8 policy definition are otherwise met.
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CALU Practice Notes – Corporate-owned Insurance: Shareholder Borrowing | September 2016
If the lending arrangement and policy features cause the policy to be a 10/8 policy, the following will be the tax
consequences:
Interest on the loan will not be deductible;10
The collateral insurance deduction will not be available;11 and
The normal addition to the capital dividend account (CDA) arising from the payment of the death benefit to a
private corporation will be reduced by the amount of the borrowing in respect of the policy.12
Since in our example there is no linkage between the loan interest rate and the credited rate to the policy, no
requirement to borrow to obtain the credited rate, and no restriction on the growth of investment accounts in the
UL policy, it will not be considered a 10/8 policy. As a consequence, the restrictions in the various tax attributes
noted above will not apply.
LIA Policy Definition
The rules governing “LIA policies” were introduced in 2013 to deal with unintended tax benefits arising from the use
of leverage secured by a life insurance policy and a life annuity contract.13 An LIA policy means a life insurance policy
where a policyholder becomes obligated to repay an amount to another person at a time that is dependent on
the death of the life insured; and the lender is assigned an interest in the insurance policy and an annuity contract
under which the annuity payments will continue for a period that ends no earlier than the death of the life insured.
If a policy is considered to be an LIA policy, the following tax consequences will result:
The life insurance policy will be considered non-exempt;14
The collateral insurance deduction will not be available;15
The death benefit received in respect of the policy will not increase a private corporation’s CDA;16 and
For purposes of the deemed disposition rules on death, in determining the FMV of shares of a corporation holding an LIA policy, the FMV of the annuity will be deemed to be equal to its purchase price.17
In our example, since there is no life annuity on Ms. Smith’s life, the LIA policy definition would not apply. However,
if either Ms. Smith or Holdco subsequently acquires a life annuity on her life, which is assigned as security for the
loan, this arrangement would fall within the LIA policy definition with the tax results as noted above. Clients and
their professional advisors should therefore be aware of the potential application of the LIA policy rules in these
circumstances.
Conference for Advanced
Life Underwriting
Suite 504 - 220 Duncan Mill Road
North York, ON M3B 3J5
Tel: 647-361-7612 • www.calu.com
CALU Practice Notes – Corporate-owned Insurance: Shareholder Borrowing | September 2016
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Deductibility of Interest Expense
Provided the insurance policy does not meet the definition of a 10/8 or LIA policy as discussed above, and the
proceeds of the loan are used for income producing purposes, the interest paid by Ms. Smith should generally be
deductible on an annual basis.18
In our example, Ms. Smith may borrow additional amounts provided the loan does not exceed 60% of the cash
surrender value of the UL policy. It may be the case that she uses her own funds to pay the annual interest charges
and borrows additional amounts from her bank to “fill the gap” and reinvests the borrowed funds for income
producing purposes. In these circumstances, and provided there is proper tracing of the direct use of the borrowed
funds, the interest charges on these additional borrowings should also be deductible for tax purposes.
Collateral Insurance Deduction
A collateral insurance deduction is available where a taxpayer borrows funds from a “restricted financial
institution”,19 the proceeds of the loan are used for income earning purposes, and a life insurance policy is required
by the lender to secure the debt. The deduction is equal to the lesser of the premiums payable under the policy in
respect of the year and the net cost of pure insurance (NCPI) for the policy in respect of the year. The deduction will
be prorated if the insurance coverage exceeds the outstanding loan amount in that year.20
As previously discussed, the collateral insurance deduction is not available if the policy is a 10/8 or LIA policy. This
will not restrict the collateral insurance deduction in our example. However, there is a further requirement that the
borrower and the policyholder be the same person. In this case, since Ms. Smith is the borrower and Holdco owns
and pays the insurance premiums, no collateral insurance deduction will be available.
Cash Value of Insurance as a Corporate Asset
A high cash value life insurance policy may affect a corporation’s capital tax liability and access to the small
business deduction.21
In addition, an owner of shares that are qualified small business corporation shares is currently entitled to a
lifetime capital gain deduction of approximately $800,000 in respect of capital gains realized on the disposition
of those shares.22 Life insurance cash values are considered to be passive assets for purposes of determining the
eligibility of shares for the capital gains deduction. Therefore, if the cash surrender value of the policy becomes too
large in relation to its active business assets, this can impair access to the capital gains deduction. However, in this
particular case Ms. Smith has crystallized her available capital gains deduction and therefore this is not an issue.23
The corporate-owned insurance may also impact the valuation of Ms. Smith’s shares in Holdco for purposes of the
deemed disposition rules on death.24
There may be alternative corporate ownership structures to minimize the potentially negative impacts of Holdco
owning a high cash value life insurance policy.
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CALU Practice Notes – Corporate-owned Insurance: Shareholder Borrowing | September 2016
Corporate Guarantee – Shareholder Benefit Issues
There is a potential shareholder benefit issue where a shareholder borrows funds secured by assets owned
by a corporation. The Canada Revenue Agency (CRA) has indicated that this is a question of fact for each set of
circumstances and has identified the following factors as relevant in determining if the corporation has conferred a
benefit on the shareholder:
Whether the shareholder deals at arm’s length with the corporation,
Whether there is evidence that the shareholder is unable to repay the loans when the corporation provides the
support for the borrowing, and
Whether the shareholder is required to pay a reasonable fee to the corporation for providing the guarantee or
security.
In addition, in a technical interpretation the CRA has indicated that one method of calculating the amount of the
benefit is to compare the difference between the actual interest rate and the rate that would have been applicable
without the corporation’s collateral security.25 The CRA has also indicated that where the shareholder pays a
“reasonable” guarantee fee to the corporation as consideration for granting the guarantee, the guarantee would
not, in and by itself, give rise to a benefit.26 What constitutes a reasonable fee is a question of fact.
It is unknown whether the above CRA views will be impacted by the recent Tax Court of Canada (TCC) case of Golini
v. The Queen27 which was summarized in CALU’s practice note dated August 2016. In that case, the TCC concluded
that the guarantee granted by the corporation was provided by way of an absolute assignment of the life insurance
and annuity as security; this resulted in a shareholder benefit equal to the amount of the loan less guarantee fee
payments made or to be made. It is hoped that this decision will be limited to facts of a similar nature, including:
(a) a series of transactions where the loan, annuity and life insurance were put into place (i.e., the life insurance
was purchased as part of the loan transactions and arguably not because of an insurance need);
(b) the annuity and life insurance were offshore products;
(c) the amount of the loan went through a series of virtual transfers and loans through a number of entities, ending
up back where it started; and
(d) the loan was a limited recourse loan where the borrower’s only recourse for non-payment was the annuity and
life insurance used as security.
Until the CRA comments on how it will apply the decision in Golini v. The Queen, shareholders and their advisors
need to take stock of the possible implications of this decision to a proposed loan to a shareholder where a COLI
policy will be used as security.
Conference for Advanced
Life Underwriting
Suite 504 - 220 Duncan Mill Road
North York, ON M3B 3J5
Tel: 647-361-7612 • www.calu.com
CALU Practice Notes – Corporate-owned Insurance: Shareholder Borrowing | September 2016
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Interest Rate Risks and Related Shareholder Benefit Issues
Variations between the loan interest rate and the credited rates to the policy expose Ms. Smith to a different risk.
If the spread between the loan interest rate and the credited rate within the UL policy increases in the future, this
could result in the outstanding loan exceeding the cash accumulations in the insurance policy and a collateral
deficiency.28 In these circumstances the lender will require Ms. Smith to post additional collateral or repay all or a
portion of the outstanding loan.
As well, the lender typically will put a percentage limit on how much will be advanced against the cash value of
the policy, based on the type of policy (UL or participating whole life) and the nature of the underlying investment
accounts. These limits need to be factored into determining the maximum leverage amount available under the
policy. It is also important to understand that the terms of the loan, including the loan percentage limits, may be
subject to change by the lender in the future.
If for whatever reason a collateral deficiency arises, and Ms. Smith (or Holdco) fails to correct this deficiency, the
lender may act under the collateral security agreement to seize and surrender the UL policy. This could have
significant and severe tax and non-tax consequences. First, as a result of the surrender of the insurance policy the
excess of the cash surrender value over the adjusted cost basis of the policy will be included in Holdco’s income.29
Second, Ms. Smith will lose the insurance coverage that is needed to help fulfill her estate plan. And finally, the use
of Holdco assets to repay Ms. Smith’s debt could result in the assessment of a shareholder benefit equal to the
amount of the repayment by Holdco. However, any amounts recovered by Holdco from Ms. Smith should reduce
the benefit amount.30 This result can be avoided if the lender is prepared to allow the cash surrender value of the
policy to be received by Holdco and paid to Ms. Smith as a dividend, who in turn would repay the outstanding loan.
However, Holdco would be responsible for taxes on any policy gain, and Ms. Smith will still need to contend with the
tax liability arising from the payment of the dividend.31
Ms. Smith could also enter into a loan agreement with Holdco for the repayment of amounts paid by Holdco
under the security arrangement. While the amount of such loan will be included in Ms. Smith’s income,32 there is a
corresponding deduction if Ms. Smith subsequently repays this loan.33
If the TCC decision in Golini v. The Queen resulted in an immediate shareholder benefit on the granting of the
security when the loan was originally made (as discussed above), presumably the fulfilling of the guarantee by
Holdco would not result in additional tax consequences; but this is not at all clear.
Application of the General Anti-Avoidance Rule
The application of the General Anti-Avoidance Rule (GAAR)34 must be considered in relation to any planning strategy
that may provide tax benefits. GAAR applies to any “avoidance transaction,” which is a transaction or series of
transactions that result in a “tax benefit,” when it may reasonably be considered that the transaction results in a
misuse of the provisions of the Act or an abuse having regard to the provisions of the Act read as a whole.
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CALU Practice Notes – Corporate Owned Insurance: Shareholder Borrowing | September 2016
While we are not aware of any taxpayer situations where GAAR has been applied to a shareholder who borrows
using the security of a COLI policy, GAAR was put forward by the Crown as an alternative position in Golini v. The
Queen. In obiter, the TCC did consider whether GAAR would apply to the series of transactions and concluded that
the series did result in the avoidance of a deemed dividend under subsection 84(1) of the Act and would be caught
by GAAR.
Considerations on the Death of Ms. Smith
Holdco-Opco Arrangements – Determination of the Addition to the Capital Dividend Account
Where an individual shareholder has established a Holdco-Opco arrangement, and insurance is required for
business or estate planning purposes, it is common for the insurance to be owned by the Holdco. This protects the
policy from creditors of Opco, and permits the retention of the policy should Opco be sold in the future. However,
the insurance benefit itself may be required in Opco. For example, as in the case of Ms. Smith, Opco is obligated to
redeem the shares of Holdco as part of a business succession plan. In these situations, Holdco will own and pay the
premiums under the insurance policy on the life of the shareholder, with Opco designated as the beneficiary.
While there are valid business reasons for arranging the insurance in this manner, there was also the potential
for an enhanced addition to the CDA. Where Holdco is both the owner and beneficiary of the insurance policy, the
addition to the CDA is equal to the life insurance death benefit less the ACB of the insurance policy.35 However,
where the corporate beneficiary of the policy is different from the owner of the policy, for deaths occurring before
March 22, 2016, the CDA addition would be equal to the full amount of the life insurance death benefit.36 It is
important to note that any enhancement to the CDA due to this structure would diminish over time, since the
ACB of the policy eventually declines to nil as the life insured grows older.37
The 2016 Federal Budget38 proposes to eliminate the potential for an enhancement to the CDA in the circumstances
described above by reducing the CDA addition by the ACB of a policyholder’s (as opposed to the death benefit
recipient’s) interest in the policy. The proposed changes will apply to any insurance proceeds received as a result
of a death that occurs after March 21, 2016.39 In addition, the budget documents indicate that an information
reporting requirement will apply where a corporation or partnership is not a policyholder but entitled to receive a
policy benefit.
Therefore, in this particular case, Opco’s CDA credit arising from the receipt of the insurance proceeds will be
reduced by the ACB of the insurance policy to Holdco. This will reduce the amount that may be flowed up to Holdco
as a tax-free capital dividend, and in turn the amount that may be paid to Ms. Smith’s estate as a tax-free capital
dividend. However, the CDA credit should be sufficient to dividend out enough of the death benefit to the estate so
that the estate can repay the outstanding loan to Ms. Smith, provided the lender agrees.
Conference for Advanced
Life Underwriting
Suite 504 - 220 Duncan Mill Road
North York, ON M3B 3J5
Tel: 647-361-7612 • www.calu.com
CALU Practice Notes – Corporate-owned Insurance: Shareholder Borrowing | September 2016
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Transfers of Insurance from a Shareholder to a Private Corporation
Due to proposals contained in the 2016 Federal Budget, it is important to determine whether the insurance on
Ms. Smith’s life was acquired by Holdco as a result of a previous transfer of the policy from Ms. Smith (or another
non-arm’s-length person). For example, Ms. Smith may have originally acquired the $2 million of insurance on her
life for personal and/or business purposes. At a later date, she may have determined that Holdco should be the
owner and beneficiary of the policy.
In those situations where a policy is transferred from an individual shareholder to a corporation with whom that
person is not dealing at arm’s length, subsection 148(7) of the Act provides rules that determine the proceeds of
the disposition to the shareholder and the cost to the acquiring corporation.40 In effect, the deemed proceeds of the
disposition is equal to the “value” of the policy (i.e., the cash surrender value (CSV) of the policy41) and the transferee
is deemed to have acquired the policy for an amount equal to the transferor’s deemed proceeds.
There may be situations where the FMV of a life insurance policy exceeds its CSV. This can arise where the policy
has been in force for a number of years, reflecting the value of premiums paid in the past and/or the fact that there
has been a deterioration in the health of the life insured. In these circumstances it may make sense to transfer the
insurance policy to the corporation for an amount reflecting its FMV, with the shareholder receiving cash, debt or
shares in the corporation.
Under the rules that applied prior to March 22, 2016, the following were the tax outcomes:
The shareholder would be deemed to have received proceeds equal to the policy’s CSV, rather than the FMV of
the consideration received on the transfer. The shareholder would have reported an income gain to the extent
those deemed proceeds exceeded the ACB of the policy.42
The corporation would acquire the policy at a cost equal to the policy’s CSV, which is less than what was actually
paid for the policy. This can have negative tax results for the corporation if the policy is subsequently surrendered, as the policy gain determined on surrender may have been lower if the corporation’s cost reflected the
FMV of any consideration paid for the policy. Alternatively, it can have positive tax results if the policy is held until
the death of the life insured, as the CDA addition may be higher than would otherwise have been the case if the
corporation’s cost reflected what had actually been paid for the policy.
Assuming the FMV of the consideration paid by the corporation is less than or equal to the FMV of the policy,
there would have been no shareholder benefit on the transfer.43
The 2016 Federal Budget44 proposes to amend subsection 148(7), for dispositions after March 21, 2016, to adjust
the deemed proceeds of the disposition to the shareholder45 by an amount equal to the greatest of the FMV of the
consideration given for the interest, the CSV of the interest in the policy at the time of disposition and the ACB of the
interest in the policy to the policyholder immediately before the disposition. The cost to the corporation of acquiring
the policy will be increased by a similar amount.
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CALU Practice Notes – Corporate-owned Insurance: Shareholder Borrowing | September 2016
For non-arm’s-length transfers that took place after 1999 and before March 22, 2016, where death occurs after
March 21, 2016, the budget further proposes to reduce the CDA addition to the transferee corporation upon the
death of the life insured, by the difference between the FMV of the consideration given for the interest on the
previous transfer and the greater of the CSV of the interest in the policy at that time, and the ACB of the interest in
the policy to the policyholder immediately before the disposition.
This means that if Ms. Smith transferred her policy to Holdco before March 22, 2016, and received consideration
that exceeded the greater of the CSV and ACB of the policy at that time, the CDA credit from the receipt of the
insurance proceeds on Ms. Smith’s death will not only be reduced by the ACB of the policy at that time, but also the
amount by which the FMV of the consideration exceeded the greater of the CSV and ACB of the policy at the time of
transfer. For example, if the policy was transferred by Ms. Smith to Holdco for consideration of $200,000, the ACB of
the policy immediately before the transfer was $75,000 and the CSV of the policy was $50,000 at that time, Opco’s
CDA credit from the receipt of the death benefit would be reduced by both the ACB of the policy to Holdco at the
time of Ms. Smith’s death, plus an additional $125,000.
Structuring Repayment of the Loan – Possible Shareholder Benefit Issues
The death of Ms. Smith will require repayment of the outstanding loan. However, as noted above, if the loan is
repaid directly by the proceeds of the life insurance policy under the collateral assignment, a taxable benefit will
be assessed to the estate as shareholder of Holdco. This assessment of a shareholder benefit may be avoided
with careful planning. The estate of Ms. Smith could provide new security to the lender in replacement of the life
insurance policy. Upon the receipt of the life insurance proceeds, Holdco would pay a dividend to the estate equal
to those proceeds. A significant portion of the death benefit can be received as a tax-free capital dividend.46 The
estate can use the after-tax proceeds to repay all or substantially all of the personal borrowings.
Another approach would be for Ms. Smith’s estate to provide a promissory note to Holdco equal to the amount
of the loan repaid through the life insurance proceeds. Despite the insurance proceeds being used to repay
Ms. Smith’s loan, Holdco will still be entitled to a credit to its CDA. It can therefore pay a capital dividend to
Ms. Smith’s estate satisfied by way of a promissory note which can be used to offset the debt between the
estate and Holdco arising from the repayment of Ms. Smith’s loan. Presumably this will reduce or eliminate the
shareholder benefit that might otherwise be assessed under this arrangement.
As noted above, if the TCC decision in Golini v. The Queen47 was applied to this fact situation, and this resulted in an
immediate shareholder benefit on the granting of the security when the loan was originally made. As discussed
above, it is not clear what the tax implications will be when Holdco actually repays the loan on behalf of the estate.
As is evident from the above discussion, it would be prudent for Ms. Smith and the lender to document the process
for repaying the outstanding loan on her death, in order to minimize the possibility of a taxable shareholder benefit
being assessed to her estate.
Conference for Advanced
Life Underwriting
Suite 504 - 220 Duncan Mill Road
North York, ON M3B 3J5
Tel: 647-361-7612 • www.calu.com
CALU Practice Notes – Corporate-owned Insurance: Shareholder Borrowing | September 2016
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Conclusions
There are a number of tax and related issues that need to be considered before a shareholder implements
a lending arrangement secured by the collateral assignment of a COLI policy. In particular, a review must be
undertaken to ensure that:
The 10/8 and LIA policy rules don’t apply to the loan arrangement;
Subsection 55(2) is considered where there is an Opco/Holdco arrangement and Opco is paying dividends that
are used to fund insurance premiums and/or deposits;
The potential for a shareholder benefit assessment is minimized where insurance proceeds are used to directly
repay any outstanding loan amounts;
The potential impact of the 2016 Federal Budget proposals are understood;
Interest rate risks are understood and managed; and
Access to the CDA credit arising from the receipt of the insurance proceeds is not compromised.
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CALU Practice Notes – Corporate-owned Insurance: Shareholder Borrowing | September 2016
Endnotes
1
For example, through a partial surrender of the policy, a
policy dividend taken in cash, or a policy loan.
2
See paragraph (e) of the definition of “disposition” in
subsection 148(9) of the Income Tax Act (Canada) (the
“Act”). See also Canada Revenue Agency (CRA) Technical
Interpretation 9210680 dated May 11, 1992, and
2006-017501I7. The CRA has, in general, accepted that
an insurance company can make a loan secured by an
insurance policy that is not a policy loan for purposes of
the Act.
3
A “front-end” leverage arrangement typically
contemplates borrowing against the cash value of the
insurance policy shortly after the issuance of the policy,
whereas “back-end” leverage arrangements illustrate
the potential of borrowing against the policy in the
future (typically to fund a business buy-out or provide
retirement funds to the shareholder). The example used
in this practice note illustrates a “back-end” leverage
arrangement.
4
As defined in subsection 186(4) of the Act.
5
Subsection 112(1) of the Act.
6
Subsection 186 of the Act.”
7
For purposes of this discussion it is assumed that
subsection 55(2) will not apply to these dividends as the
payment of the dividends does not meet the purpose
test in subsection 55(2.1) of the Act.
8
A discussion of the calculation and allocation among
classes of shares of safe income is beyond the scope
of this practice note, except it is noted that specific
considerations may apply where the shares are fixedvalue preference shares.
17
Subsection 70(5.31) of the Act.
18
Paragraph 20(1)(c) of the Act. A discussion of the rules
governing interest deductibility are beyond the scope of
this article.
19
A restricted financial institution is defined in subsection
248(1) of the Act and includes a bank, credit union or an
insurance corporation.
20
Paragraph 20(1)(e.2) of the Act.
21
Section 125 of the Act. The amount of the deduction
is reduced to the extent that the corporation’s taxable
capital exceeds $10 million.
22
Section 110.6 of the Act.
23
However, if a company ceases to be a small business
corporation, the corporate attribution rules in subsection
74.4 could commence to apply to Ms. Smith depending
on the identity of the owners of the common shares
and, if a trust, whether the trust contains the restrictions
identified in 74.4(4).
24
Subsection 70(5.3) of the Act generally provides that,
for purposes of determining the fair market value (FMV)
of shares in a private corporation that are deemed
to be disposed of as a consequence of the death of
a shareholder, the FMV of any corporate-owned life
insurance on the shareholder’s life will be equal to the
policy’s cash surrender value immediately before death.
25
Subsection 15(1) and CRA Technical Interpretation
2000-0002575 dated March 29, 2000.
26
CRA Technical Interpretation 2006-0174011C6 dated
June 29, 2006.
27
(2016) TCC 174. As of the date of publication of the
practice note it is not known whether this decision will
be appealed by the taxpayer.
28
This risk can increase where the loan interest is not
actually paid each year, but is instead added to the
outstanding loan amount.
9
10/8 policy is defined in subsection 248(1) of the Act.
10
Subsection 20(2.01) of the Act.
11
Subparagraph 20(1)(e.2)(ii) of the Act.
12
See (d)(iv) of the definition of capital dividend account in
subsection 89(1) of the Act.
29
13
LIA policy is defined in subsection 248(1) of the Act.
Subsection 148(1) and paragraph 56(1)(j) of the Act.
30
14
Subsection 306(1) of the Income Tax Regulations (Canada).
Supra note 25.
31
15
Paragraph 20(1)(e.2) of the Act.
16
See (d)(ii) of the definition of capital dividend account in
subsection 89(1) of the Act.
As Ms. Smith has not died, none of the amounts received
from the life insurance can be added to Holdco’s capital
dividend account as a death benefit. As a result, the
dividend cannot be a tax-free capital dividend under
subsection 83(2) of the Act.
Conference for Advanced
Life Underwriting
Suite 504 - 220 Duncan Mill Road
North York, ON M3B 3J5
Tel: 647-361-7612 • www.calu.com
CALU Practice Notes – Corporate-owned Insurance: Shareholder Borrowing | September 2016
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32
Subsection 15(2) of the Act.
39
33
Provided all the requirements of paragraph 20(1)(j) of
the Act are satisfied.
The proposed rules therefore apply to any life insurance
arrangements put in place before March 22, 2016.
40
It should be noted that subsection 148(7) is broader in
scope, also applying to gifts of insurance, distributions
of insurance from a corporation, transfers by operation
of law, or any other disposition to a person who is not
dealing at arm’s length with the transferor.
41
The term “value” is defined in subsection 148(9) of the Act.
42
Supra note 29.
43
Subsection 15(1). See also CALU 2002 CRA Roundtable
Q.6 (2002-0127455) where this type of fact situation
was posed to the CRA and it confirmed these tax
results. At that time the CRA also indicated that “we
previously brought this situation to the attention of the
Department of Finance and have been advised that it will
be given consideration in the course of their review of
policyholder taxation.”
44
As modified by draft legislation released on July 29, 2016.
45
Other than a taxable Canadian corporation.
46
See definition of CDA in subsection 89(1), and subsection
83(2) of the Act.
47
Supra note 27.
34
Subsection 245(1) of the Act.
35
By virtue of paragraph (d) of the definition of capital
dividend account in subsection 89(1) of the Act.
36
This result was confirmed by the CRA in Technical
Interpretation 9908430 dated June 30, 1999. The
CRA further indicated that unless there are bona
fide reasons, other than to obtain a tax benefit, for
this insurance structure, there may be a reasonable
argument to apply General Anti-Avoidance Rules in
subsection 245(2) of the Act to reduce the CDA by the
ACB to the owner of the policy at the time of death.
37
38
This is because the ACB of a policy is reduced by the net
cost of pure insurance (NCPI). The NCPI is a notional
mortality charge for the cost of insurance which
increases as the life insured ages, and will eventually
exceed the total of all premiums paid into the policy.
The Department of Finance released draft legislation
relating to this and other budget proposals on July 29,
2016.
About CALU
The Conference for Advanced Life Underwriting (CALU) is a national professional membership
association of established financial advisors (life insurance, wealth management and employee
benefits), accounting, tax, legal and actuarial professionals. For more than 25 years CALU has
engaged in political advocacy and government relations activities relating to advanced planning
issues on behalf of its members and the members of its sister organization, Advocis, The Financial
Advisors Association of Canada. Through these efforts, CALU represents the interests of some
11,000 insurance and financial advisors and in turn the interests of millions of Canadians. For
more information please visit www.CALU.com.
Conference for Advanced
Life Underwriting
Suite 504 - 220 Duncan Mill Road
North York, ON M3B 3J5
Tel: 647-361-7612 • www.calu.com
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CALU Practice Notes – Corporate-owned Insurance: Shareholder Borrowing | September 2016