CRA treats a trust distribution of a life insurance policy to a beneficiary as being made for FMV consideration equal to the part of the beneficiary’s capital or income interest that is satisfied

Suppose that a private corporation (Aco) distributes a life insurance policy of which it was the holder and beneficiary and with an adjusted cost basis (ACB), cash surrender value (CSV) and FMV of $50, $150 and $250, respectively as a dividend in kind to a discretionary family trust shareholder, and that such trust then distributes the policy as an income distribution under ss. 104(6), (13) and (19) to a corporate beneficiary (Xco).

CRA considers that a dividend-in-kind of a life insurance policy by a corporation (Aco) to its shareholder is made for no consideration for purposes of s. 148(7)(a)(ii)(B), so that on the dividend-in-kind, the policy was deemed to be disposed of for the greatest of its ACB, CSV and the (nil) consideration received, or $150. However, where a trust transfers the policy to its beneficiary, the beneficiary (Xco) is regarded as giving consideration for the transfer that is all or any part of the beneficiary's income or capital interest, as applicable. Here, it would be reasonable to consider that such consideration had an FMV of $250.

If s. 106(3) rather than s. 148(7) was regarded as applying to the distribution, s. 106(3) also would generate deemed FMV proceeds. Thus, it made no difference which of s. 106(3) and s. 148(7) prevailed over the other.

Neal Armstrong. Summaries of 3 November 2023 APFF Financial Strategies Roundtable, Q.4 under s. 148(7) and s. 107(2).