7 May 2002 External T.I. 2002-0127455 - non-arm's length disposition

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CCRA.

Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ADRC.

Principal Issues:

1.A shareholder will transfer a life insurance policy to a corporation it controls for consideration equal to the fair market value of the policy. The policy has no cash surrender value at the time of the transfer. What will be the proceeds of the disposition to the policyholder pursuant to 148(7)?

2.Will there be a shareholder benefit pursuant to 15(1)?

Position:

1. The proceeds of the disposition will be equal to the "value" of the policy.

2.No

Reasons:

1. Pursuant to 148(7)
2. The shareholder is receiving consideration equal to the fair market value of the policy

CALU - Conference for Advanced Life Underwriting May 7, 2002

Question 6

Non-arm's length dispositions

An interest in a life insurance policy is disposed of by the policyholder to a person with whom the policyholder is not dealing at arm's length. Subsection 148(7) deems the policyholder to become entitled to receive "proceeds of the disposition" equal to the "value" of the interest in the policy. "Value" is defined in subsection 148(9) to generally mean the cash surrender value of the policy.

The life insurance policy will have no cash surrender value at the time the policy is transferred. However, this policy will apparently have a cash surrender value in the future. The policyholder is a shareholder who controls a corporation and the shareholder wants to transfer the policy to the corporation for consideration equal to the fair market value of the policy.

What are the "proceeds of the disposition" to the policyholder and the cost of the interest to the corporation pursuant to subsection 148(7)? Will there be a shareholder benefit pursuant to subsection 15(1)?

Agency's Response

Pursuant to subsection 148(7) the "proceeds of the disposition" to the policyholder are deemed to be equal to the "value" of the policy. Pursuant to the definition of "value" in subsection 148(9) since there is no cash surrender value at the time the policy is transferred the "value" would be nil and so would the "proceeds of the disposition". Consequently, the cost of the interest to the corporation would also be nil. Where the shareholder is receiving consideration equal to the fair market value of the policy there would not be a shareholder benefit pursuant to subsection 15(1).

The result of this transaction is that the shareholder is effectively receiving a distribution from the corporation on a tax-free basis. Notwithstanding that the corporation will have a reduced adjusted cost basis in the policy it is not clear that the above result is intended in terms of tax policy. We previously brought this situation to the attention of the Department of Finance and have been advised that it will be given consideration in the course of their review of policyholder taxation.