9 June 2003 External T.I. 2003-0004275 - ACB OF TRANSFERRED LIFE INSURANCE POLICIES

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 CCRA.

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

Principal Issues: If the FMV of a policy exceeds its CSV and the policy is transferred in circumstances such that subsection 148(7) applies, can the transferee, in computing the ACB of the policy include the full amount of any subsection 15(1) benefit realized on the transfer?

Position: No

Reasons: The legislation

CALU - Conference for Advanced Life Underwriting (2003)

Question 4

Transfer of a life insurance policy by a corporation to a shareholder or employee

A corporation is the owner and beneficiary of an insurance policy on the life of a senior executive officer, who is also a shareholder. The policy was acquired to provide key person coverage to indemnify the corporation for a potential loss of profits or additional costs that may be incurred in the event of death of the insured. The individual retires and the corporation no longer needs the policy. The corporation transfers the policy to the individual for no consideration. Immediately before the transfer, the details of the policy are as follows:

?	Death benefit			$1,000,000
?	Cash surrender value		$   125,000
?	Adjusted cost basis		$     50,000
?	Fair market value		$   125,000

The income tax implications of the transfer for the corporation and the individual appear to be as follows:

(i) Pursuant to subsection 148(7), the corporation is deemed to become entitled to receive proceeds of disposition equal to the cash surrender value (CSV) of the policy (i.e. $125,000)

(ii) Pursuant to subsection 148(1), the corporation must include $75,000 in computing its income - the excess of the deemed proceeds over the adjusted cost basis (ACB) of the policy. (i.e. $125,000 - $50,000).

(iii) Pursuant to either paragraph 6(1)(a) or subsection 15(1), the individual must include in income the fair market value of the policy (i.e. $125,000).

(iv) Assuming that the policy was transferred by the corporation to the individual because of the individual's position as a senior executive of the company and not because the individual was a shareholder, the corporation would be entitled to a deduction in computing its income for an amount equal to the fair market value of the policy (i.e. $125,000).

(v) Pursuant to subsection 148(7), the individual is deemed to acquire the policy at a cost equal to the CSV of the policy (i.e. $125,000).

(vi) Pursuant to the definition of "adjusted cost basis" in subsection 148(9), the ACB of the policy to the individual would include the cost of the policy as determined in (v) above and the amount included in computing the individual's income as determined in (iii) above. Accordingly, immediately after the transfer, the ACB of the policy to the individual would be $250,000 ($125,000 by virtue of the description of A and $125,000 by virtue of the description of C in the definition of "adjusted cost basis" in subsection 148(9)).

Does the Agency agree with the above description of the income tax implications for the corporation and the individual?

Agency's Response

Based on the facts set out in the question, and provided the "value" of the policy at the time of transfer as determined under the definition of "value" in subsection 148(9) is equal to the CSV of the policy, we agree with the income tax implications as set out in (i) to (v) above. However, with respect to the determination of the adjusted cost basis of the policy to the shareholder/employee as described in (vi) above, we disagree. In a transaction where,

a) subsection 148(7) applied to a transaction,

b) the fair market value (FMV) of the policy exceeded the CSV of the policy and,

c) the transferee was required to include an amount in income under subsection 15(1), in respect of the transfer,

then, we would allow the addition of the excess of FMV of the policy over the CSV policy in computing the ACB of the policy to the transferee. Where the FMV and cash surrender value of the policy are identical, there is no amount to be added to the ACB of the policy under C of the definition of ACB in subsection 148(9).