.

Generally in cases where corporate-owned life insurance is required, it is recommended that the corporation be the owner and the beneficiary of the life insurance policy. This way, the death-benefit of the policy can flow through the corporation’s capital dividend account (CDA) and be distributed tax free (minus the adjusted cost base of the policy) to buy out the shares of the deceased shareholder from his/her estate.

Sometimes when a bank requires a life insurance policy to insure a loan, they may insist that the lender be named as the beneficiary of the corporate owned policy. So far, it has been debateable whether upon the death of the key shareholder, the death benefit that would be paid by the insurance company to the creditor, could still be credited to the capital dividend account.

Fortunately a recent case clarified this issue and confirmed that the corporation is entitled to add the proceeds of the policy to its capital dividend account. In the case entitled Innovative Installation Inc. v. The Queen (2009 TCC 580). In 1999, the corporation borrowed money from Royal Bank and acquired key person insurance on the life of its founder from Sun Life Financial. When the founder died, the death benefit of the policy was paid directly to Royal Bank. The company proceeded to add the death benefit to the capital dividend account of the corporation by the CRA denied this since Royal Bank was the entity that “received” the death benefit and not Innovative Installation Inc. Itself.

The case went to court and fortunately the judge disagreed with CRA’s interpretation and was of the opinion that the word “receive” in the Tax Act refers to the party that receives the benefit of the insurance proceeds and in this case Innovative was the party that received the benefits and was therefore entitled to add the proceeds of the death benefit to its capital dividend account.

7 Comments for this entry

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