Life insurance proceeds received by a CFA generally will not be added to its exempt surplus

CRA considers that, except in "very rare cases," life insurance proceeds received by a foreign subsidiary on the life of its indirect shareholder (holding it through Canco) would not be added to exempt (or taxable) surplus, so that a distribution of the proceeds would grind the basis in its shares. Given that there also would be no credit to Canco’s capital dividend account, structuring this way would be boneheaded.

Neal Armstrong. Summary of May 2014 CALU Roundtable, Q. 7, 2014-0523341C6 under Reg. 5907(2)(f).