CRA indicates that on a life insurance policy’s gratuitous transfer to a shareholder/executive, the policy’s ACB to that individual is increased by the excess of the policy’s FMV over the deemed s. 148(7) proceeds

A corporation, which was the owner and beneficiary of an insurance policy on the life of an individual who was a senior executive officer and a shareholder, transferred the policy to the executive upon retirement for no consideration. The policy particulars were:

• Death benefit: $1,000,000
• Adjusted cost base (ACB): $100,000
• Cash surrender value (CSV): $50,000
• Fair market value (FMV): $125,000

CRA confirmed that on such disposition, the corporation was deemed under s. 148(7) to receive proceeds of disposition equal to $100,000, being the greatest of the $50,000 CSV, the nil FMV of the consideration and the $100,000 ACB. Consequently, pursuant to s. 148(1), the corporation did not realize a policy gain (over the $100,000 ACB); and pursuant to s. 148(7)(b), the individual was deemed to acquire the policy at a cost equal to such deemed proceeds of $100,000. If the policy was received qua shareholder, there would be an income inclusion to the individual of $125,000 pursuant to s. 15(1); and if received qua employee, there would be an income inclusion of the $125,000 under s. 6(1)(a), with a corresponding deduction available to the corporation.

Additionally, there would be a further addition to the ACB of the policy to the individual (pursuant to variable C of the definition respecting “an amount in respect of the disposition of an interest in the policy … that was required to be included in computing the policyholder’s income”), equal to the excess of the FMV of the policy over the deemed proceeds of disposition under s. 148(7)(a), namely, of $25,000 ($125,000 FMV - $100,000 deemed proceeds), thereby increasing the ACB to $125,000.

Regarding the reporting requirements of the insurance company under Reg. 217(2), CRA stated:

Although not a party to the disposition, we would expect an insurer to be aware of any changes to the policyholder arising from a disposition of a life insurance policy to ensure that the policy continues to be in effect and make any necessary adjustments to the ACB as appropriate.

Neal Armstrong. Summary of 18 September 2025 CLHIA Roundtable Q. 6, 2025-1067961C6 under s. 148(9) – adjusted cost basis – C and s. 148(7).