ARCHIVED - Valuation of Shares of a Corporation Receiving Life Insurance Proceeds on Death of a Shareholder

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NO: IT-416R3

DATE: July 10, 1987

Valuation of Shares of a Corporation Receiving Life Insurance Proceeds on Death of a Shareholder

REFERENCE: Subsections 70(5) and 70(5.3)

This bulletin cancels and replaces IT-416R2 dated September 26, 1984. Current revisions are designated by vertical lines.

1. Paragraph 70(5)(a) deems the property of a deceased person to have been disposed of immediately before death for proceeds equal to the fair market value of the property at that time.

2. The property referred to in 1 may include shares of a corporation the value of which depends at least in part upon the value of a life insurance policy under which the decedent was the person whose life was insured. The corporation's interest in the policy may be direct or it may be through its ownership of shares of another corporation. In either case, for deaths occurring after December 1, 1982, subsection 70(5.3) provides that the value of the policy immediately before death shall be its cash surrender value at that time as determined under paragraph 148(9)(b) (see 3 below). Where the death occurred prior to December 2, 1982, the comments in paragraphs 4 and 5 below apply.

3. In determining the cash surrender value of a policy for the purposes of subsection 70(5.3), paragraph 148(9)(b) provides that policy loans outstanding, policy dividends payable and any interest payable upon such dividends shall be disregarded. In addition to those specific exclusions, the Department also considers that prepaid premiums and dividends left on deposit are not elements of the cash surrender value of a policy although their values, and the values of those elements specifically excluded, may affect the values of the shares of a corporation which is the owner and beneficiary of the policy.

Death of Shareholder before December 2, 1982

4. Where subsection 70(5.3) does not apply, the insurance policy, as a component of the assets underlying the shares, will be valued in accordance with normal valuation practices taking into consideration all facts relevant to the particular case. In this regard, the value established for the insurance policy immediately before death should be based on relevant factors relating to the deceased shortly before death, e.g., the day prior to death (see 5 below).

5. Major factors that should be taken into account are

(a) the cash surrender value, if any, of the policy,

(b) the life expectancy of the insured based on mortality tables, and

(c) the state of the health of the insured as it would be known to other persons.

For example, the value of an insurance policy could approach its face value if it were known that the insured had a terminal illness or was critically injured as a result of an accident and not expected to recover. Conversely, it would have little added value if a person in apparently excellent health were to die unexpectedly as a result of an accident or heart attack. For valuation purposes the state of health of the insured prior to death would override the effect of an unexpected death due to a cause not related to any known health problem. Therefore, if a person with terminal cancer died from an unexpected heart attack the actual cause of death would not be relevant in the valuation, but the fact that the person had terminal cancer would.

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