CRA finds that a dividend-in-kind of a life insurance policy avoids the policy’s disposition at FMV

A corporation (“Holdco”) holds a policy on the life of its sole shareholder with an adjusted cost basis (“ACB”), cash surrender value (“CSV”) and fair market value (“FMV”) of $200k, $240K and $450K, respectively. If Holdco transfers the policy to its shareholder as a dividend in kind, its proceeds of disposition (and his cost) will be only the CSV of $240K, since the FMV of the consideration received by it is nil (so that its gain is $40K) - whereas its proceeds of disposition would have been $450K if Holdco instead had paid a $450K dividend to its shareholder, and he had purchased the policy for $450K. (In both scenarios, he would include a $450K dividend (plus gross-up) in his income.)

CRA considers that the lower gain in the dividend-in-kind scenario might be anomalous, and has raised this with Finance.

CRA did not mention s. 52(2), which provides that property paid as a dividend in kind is deemed to have been disposed of and acquired at its FMV – perhaps because it thought it was obvious that s. 52(2) was trumped by s. 148(7).

Neal Armstrong. Summary of 7 June 2017 External T.I. 2016-0671731E5 Tr under s. 148(7)(a).