CRA indicates that whether the conversion of a term to a permanent life policy entails an acquisition for s. 248(35)(b) purposes turns on whether this goes “to the root of the policy”
S. 248(35)(b) indicates that, for donation credit or deduction purposes, the fair market value of a gift of property is deemed to be the lesser of the property’s actual FMV and its ACB, if the gift was made (otherwise than as a consequence of death) less than three years (or, in some circumstances, 10 years) of its acquisition. When asked whether, for purposes of counting out the three (or 10) year period, a gifted life insurance policy would be considered to have been acquired when it was initially issued as a term life insurance policy or at the time it was converted from a term policy to a permanent life insurance policy pursuant to the provisions of the policy, CRA indicated that this was a mixed question of fact and law that would require a review of all the policy’s provisions “to determine whether the changes are so fundamental as to go to the root of the policy.”
CRA further indicated that this question was not affected by s. 148(10)(d) (which deems there to be no disposition or acquisition of a policy as a result only of the exercise of any provision (other than a conversion into an annuity contract) of the policy), as this provision applies only for purposes of s. 148. However, it could be relevant to determining the policy’s adjusted cost basis.
Neal Armstrong. Summary of 8 November 2021 External T.I. 2021-0882391E5 under s. 248(35)(b).