CRA has raised the avoidance of an FMV disposition on a dividend-in-kind of a life insurance policy with Finance

A corporation (“Holdco”) holds a policy on the life of its sole shareholder with a nominal cash surrender value (“CSV”) and an adjusted cost basis (“ACB”) and fair market value (“FMV”) of $50K 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 ACB of $50K, since the FMV of the consideration received by it is nil. Accordingly, the transfer occurs on a rollover basis - 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.)

This Interpretation is essentially identical to 2016-0671731E5 F, except that in the latter, there was a modest excess of the CSV of the policy over the ACB, so that such excess was realized as a gain on the dividend-in-kind –rather than a much higher gain that would have been realized on a sale of the policy at FMV. In both Interpretations, CRA considered that the lower gain in the dividend-in-kind scenario might be anomalous, and has raised this with Finance.

Neal Armstrong. Summary of 18 May 2017 CLHIA Roundtable, Q.2, 2017-0690331C6 under s. 148(7)(a).