From: AlanBaggett@volcanomail.com   
      
   Death, taxes and a tangled life insurance case :CRA SOTW    
      
   Death, taxes and a tangled life insurance case   
      
   By James Daw Personal Finance Columnist    
      
   The good thing about life insurance is the death benefit is tax-free   
   Somehow, though, the Canada Revenue Agency got confused about who was entitled   
   to that fundmental benefit a few years after the owner of a small Markham   
   company died in April 2002.   
       
   Starting with a reassessment in 2006, tax collectors put Rod Peacock's widow   
   through years of emotional stress trying to collect an onerous penalty tax   
   from her as the new majority owner of Innovative Installation Inc.   
      
   But last week Justice C.H. McArthur of the Tax Court of Canada put things   
   right. He ruled the CRA's position "defied common sense and natural justice."   
      
   Markham lawyer Robin Mac-Knight of Wilson Vukelich LLP said after reading the   
   ruling he was surprised by the CRA's position. But the details could be useful   
   to other owners of Canadian-controlled private corporations.   
      
   Before his death, Peacock had signed to have his company buy $196,000 worth of   
   insurance on his life when he arranged a business loan with the Royal Bank.    
      
   This type of insurance is called creditor life insurance and is the only type   
   of life insurance banks may sell at branches. Buying the coverage from the   
   bank, or a more complete policy of life insurance from another agent or   
   broker, was not a condition    
   of the loan.   
      
   Peacock's father-in-law Dennis Lawson of Bracebridge, a retired executive and   
   accountant by training, stepped forward to help his daughter, Michele   
   Lawson-Peacock, after Peacock's death. He said Monday that Royal would not   
   acknowledge having acted as    
   agent in the sale of the policy. But months later when the family found proof   
   of the coverage, an arm of Sun Life Financial Corp. did pay $175,500 to Royal   
   to discharge the remaining loan balance, and $21,422 to Innovative's bank   
   account.   
      
   Lawson said two of Peacock'siblings were both shareholders, had worked with   
   their brother at the company and, like him, owed money to the company. But   
   neither Peacock's wife nor his siblings wanted to run the company.   
      
   So an accountant at McGovern, Hurley, Cunningham LLP in Toronto suggested the   
   siblings propose to have Innovative treat the insurance payment as a tax-free   
   contribution to its capital dividend account.    
   The company could then pay a $160,000 tax-free dividend, which had the effect   
   of wiping out the insiders' debts to the company.   
      
   Lawson says he researched the proposal using the Internet and discovered that   
   life insurance proceeds received by a company do indeed qualify for the   
   capital dividend account.   
      
   But the CRA ruled in 2006 the dividend payment was improper, claiming Royal   
   Bank was the beneficiary of the insurance proceeds, not the company. The   
   policy does not actually use the term beneficiary with regard to anyone, but   
   the tax agency demanded a 75    
   per cent penalty tax that applies to improperly declared capital dividends.   
      
   "We felt all along the company was the beneficiary of the life insurance,"   
   said Lawson, who drafted an objection. "I didn't have any money to pay that   
   (penalty)," said Lawson-Peacock. "And it was getting bigger and bigger with   
   the interest charges."   
      
   Using the Internet she found lawyer Stephen Du of Du Markowitz LLP, who last   
   week won the favourable court ruling. (Du is now in China and did to reply to   
   an email Monday.)   
      
   The judge agreed there should be no difference between life insurance that   
   directs payment to a bank and life insurance that pays the borrower first.   
      
   The bank was going to make money by charging interest, and had security   
   guarantees from Lawson and Lawson-Peacock. So it was the Peacocks' company,   
   and its shareholders, who were the true beneficiaries of the policy.   
   jdaw@thestar.ca   
      
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