10 April 2001 External T.I. 2000-0056205 - DISPOSITION OF A LIFE INSURANCE POLICY

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the Department.

Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle du ministère.

Principal Issues: Where a life insurance policy is transferred by a company to its corporate shareholder in satisfaction of a dividend payable in kind, will there be an increase to the adjusted cost basis of the policy with respect to the excess of the fair market value of the policy over the cash surrender value of the policy?

Position: No.

Reasons: There is no amount in respect of the disposition of an interest in a life insurance policy which is required to be included in computing the income of the corporate shareholder. The income inclusion is pursuant to paragraph 12(1)(j) with respect to the dividend.

XXXXXXXXXX 						2000-005620

April 10, 2001

Dear XXXXXXXXXX:

Re: Disposition of a Life Insurance Policy

This is in reply to your letter of November 14, 2000 wherein you requested confirmation of our position with respect to an earlier technical interpretation, document E9204375 dated March 12, 1992.

The situation which was described in document E9204375 dealt with the transfer of a life insurance policy from a corporate policyholder (X Ltd.) to its sole corporate shareholder (Y Ltd.) in satisfaction of a dividend payable in kind. As indicated in our earlier opinion and as noted in paragraph 6 of Interpretation Bulletin IT-67R3, the amount of the "dividend in kind" paid by X Ltd. and the amount of the "dividend in kind" received by Y Ltd. would be equal to the fair market value of the asset other than cash which in the situation in document E9204375 was an interest in the life insurance policy.

We stated, in our earlier opinion, that subsection 15(1) of the Income Tax Act would not apply in this situation as a dividend equal to the fair market value of the life insurance policy would be brought into income under paragraph 12(1)(j) of the Income Tax Act. We indicated that there would be no increase in the adjusted cost basis pursuant to that definition in subsection 148(9) of the Income Tax Act since no amount in respect of the disposition of an interest in a life insurance policy would be required to be included in computing the income of Y Ltd. for a taxation year. The inclusion in income in this instance would be in respect of the receipt of a dividend pursuant to paragraph 12(1)(j) of the Income Tax Act and not in respect of the disposition of an interest in the policy. We, therefore, confirm this earlier opinion since we see no basis to change our position.

We have stated in document E9705125 that where a shareholder acquired an interest in a life insurance policy from a corporation for consideration that was less than the fair market value of the policy, the excess of the fair market value over the consideration paid by the shareholder, if any, would be included in the shareholder's income pursuant to subsection 15(1) of the Income Tax Act. Since subsection 148(7) of the Income Tax Act provides that the cost of the policy to the shareholder will be an amount equal to the cash surrender value of the policy (assumed to be the value of the interest of the policy for purposes of our response), it seemed reasonable that the shareholder be entitled to include the excess of the fair market value over the cash surrender value of the policy that was included in the shareholder's income under subsection 15(1) of the Income Tax Act in the calculation of the adjusted cost basis of the policy. The amount so included in income was in respect of the disposition of an interest in the policy. As indicated in our response in document E9705125 while arguably a somewhat liberal interpretation, we took the view that such an adjustment was permitted by C of the formula in the definition of adjusted cost basis in subsection 148(9) of the Income Tax Act. As indicated we would review any situation that sought to take advantage of this interpretation to provide an inappropriate adjustment to the adjusted cost basis of a policy.

Yours truly,

F. Lee Workman
Manager
Financial Institutions Section
Financial Industries Division
Income Tax Rulings Directorate
Policy and Legislation Branch