CRA confirms that the CSV of a life insurance policy could reasonably be fully allocated on the death of a common shareholder to the holder of a tracking share
The taxpayer wants the proceeds of the universal life insurance policy on his life paid on his death to his adult child, rather than to his spouse, who is the one under his will to inherit his common shares of the private corporation (the “Corporation”) that will be the policyholder and beneficiary.
To this end, the Corporation issues for $1 a special non-voting share (the “insurance share") to the child that is non-participating except for an entitlement to a dividend (to be declared only after the taxpayer’s death) equaling the policy death benefit payable under the policy. The share also is retractable by the holder before the taxpayer's death, for the policy’s cash surrender value (“CSV”), but with payment deferred until the Corporation’s receipt of the death benefit, and is retractable by the holder (and redeemable by the Corporation) after the Corporation’s death for any excess of the death benefit over the dividend declared.
S. 70(5.3) indicates that, for purposes inter alia of s. 70(5), the fair market value of a share of the deceased shall be determined as if the fair market value (immediately before the death) of a policy on the deceased’s life was its cash surrender value (“CSV”).
CRA confirmed that, regarding the narrow issue of the FMV of the common shares immediately before the death of the taxpayer, given that the insurance share was retractable by the holder immediately before the death for the CSV, it would not be unreasonable to allocate the policy CSV to the insurance shares – so that the value of the common shares would not take the policy CSV into account.
Neal Armstrong. Summary of 19 May 2021 CLHIA Roundtable Q. 4, 2021-0884291C6 under s. 70(5.3).