CRA rules on the transfer of life insurance policies under a split-up butterfly
CRA ruled on a single-wing butterfly for the split-up of a farming corporation (DC) between (1) mother and Child 2 (who took the transferee corporation, TC), and (2) Child 1 (who stayed with DC, which kept inter alia the farm house). The assets of DC included life insurance policies on the lives of Mother and Child 1 and 2. The cash surrender value of these policies was treated as a near cash asset, whereas their fair market value in excess of their CSV was treated as investment property. All of the policy on Child 2, and a portion of the policy on mother’s life, was transferred to TC, with that portion calculated so as to help satisfy the butterfly percentage requirement.
The policies were not eligible for a s. 85(1) rollover, and as the consideration received from TC was a note equal to the transferred policy interests’ FMV, the proceeds of disposition to DC under s. 148(7) were equal to such FMV. The ruling letter stated:
None of DC, Mother, Child 1 and Child 2 expect that the Mother … or Child 2 Insurance Policy will be disposed of or that any benefits will be paid thereunder as part of the same series of transactions or events that include the Proposed Transactions.
Neal Armstrong. Summary of 2018 Ruling 2017-0714411R3 under s. 55(1) – distribution.