CRA treats the deemed proceeds arising on death from a jointly owned whole life policy as being simply a valuation matter

Opco and its sole shareholder (A) jointly acquired a universal life insurance policy on the life of A, whose stipulated death benefit equals $1 million plus the fund value of the policy immediately before A’s death. Under a co-ownership agreement, Opco is entitled to the $1 million face amount on death and bears the annual insurance charges; and A is entitled to make additional (exempt-test qualifying) deposits into the policy, can designate the fund value recipient, and is also entitled to the cash surrender value (“CSV”) on any pre-death termination.

A dies when the fund value (and CSV) of the policy equals $200,000, so that Opco receives $1 million and A’s estate receives $200,000. Is the FMV of the life insurance policy under s. 70(5.3) (generally valuing a life policy for inter alia s. 70 purposes at its CSV) $200,000; and is the FMV of Opco’s interest in the policy nil, as it has no interest in the CSV pursuant to the co-ownership agreement?

CRA responded:

[W]e cannot definitively conclude that the FMV of the interest in the life insurance policy to Opco will be nil. The terms and conditions of the shared ownership arrangement, the specific life insurance contract and all other related agreements which may form part of the particular arrangement and the particular facts at the given time would have to be considered in the determination of the FMV of Opco’s interest in the life insurance policy.

… The CRA does not have its own method for computing the FMV; this computation is based upon the facts known on the valuation date, to which the principles and standards of the Canadian Institute of Chartered Business Valuators are applied.

Neal Armstrong. Summary of 8 July 2020 CALU Roundtable Q. 5, 2020-0842191C6 under s. 70(5.3).