Translation disclaimer
This translation was prepared by Tax Interpretations Inc. The CRA did not issue this document in the language in which it now appears, and is not responsible for any errors in its translation that might impact a reader’s understanding of it or the position(s) taken therein. See also the general Disclaimer below.
Principal Issue: [TaxInterpretations translation]
Where the FMV of a life insurance policy exceeds the cash surrender value and the policy is transferred in circumstances where subsection 148(7) of the Act applies, can the transferee include, in the ACB of the policy, the full amount of the benefit included pursuant to subsection 15(1) of the Act?
Position: No.
Reason: Legislative analysis.
FINANCIAL PRODUCTS ROUNDTABLE
APFF - CONFERENCE 2003
Question 3
Transfer of a life insurance policy by a corporation to a shareholder or employee
A corporation held a life insurance policy on a senior executive who was also a shareholder. The sum insured under the policy was payable to the policyholder. The policy was purchased to provide for the potential loss of profits or additional expenses that could result from the death of the insured. As the individual had retired, the corporation no longer needed the policy. The corporation then transferred the policy to the individual for no consideration. Immediately prior to the transfer, the terms of the policy were as follows:
- Death benefit $1,000,000
- Cash surrender value $125,000
- Adjusted cost basis $50,000
- Fair market value $125,000
The tax consequences of the transfer to the corporation and the individual are as follows:
(i) Pursuant to subsection 148(7), the corporation was deemed to acquire the right to receive proceeds of disposition equal to its value, which was the cash surrender value (CSV) of the policy (i.e., $125,000)
(ii) Pursuant to subsection 148(1), the corporation was required to include $75,000 in computing its income - i.e., the excess of the deemed proceeds of disposition over the adjusted cost basis (ACB) of the policy ($125,000 - $50,000).
(iii) Pursuant to paragraph 6(1)(a) or subsection 15(1), the individual was required to include in income the fair market value (FMV) of the policy (i.e., $125,000).
(iv) Assuming that the corporation transferred the policy to the individual because the individual was a senior officer of the corporation and not because the individual was a shareholder of the corporation, the corporation would be entitled to deduct in computing its income an amount equal to the fair market value of the policy (i.e., $125,000).
(v) Pursuant to subsection 148(7), the individual was deemed to have acquired the policy at a cost equal to its FMV (i.e., $125,000).
(vi) Under the definition of "adjusted cost basis" in subsection 148(9), the individual's ACB of the policy included the cost of the policy determined in accordance with (v) above as well as the amount included in computing the individual's income as provided in (iii) above. Consequently, immediately after the transfer, the individual's ACB of the policy was $250,000 ($125,000, which is the amount described in A of that definition, and $125,000, which is the amount described in C of that definition).
Does the CCRA agree with the above description of the tax consequences to the corporation and the individual?
CCRA response
- Based on the facts presented in the question, and to the extent that the "value" of the policy at the time of the transfer, as determined in accordance with the definition of that term in subsection 148(9), is equal to the ACB of the policy, the CCRA agrees that the tax consequences in (i) through (v) above are correct.
- With respect to the determination of the ACB of the policy for the shareholder or employee described in (vi) above, we disagree. Where the FMV and CSV of a policy are identical, no amount is to be added to the ACB of the policy under variable C of the definition of ACB in subsection 148(9).
- Where:
(a) subsection 148(7) applies to the transaction,
(b) the FMV of the policy exceeds its CSV, and
(c) the transferee is required pursuant to subsection 15(1) or paragraph 6(1)(a) to include an amount in respect of the transfer in computing the transferee’s income,
the CCRA would allow the excess of the FMV of the policy over its CSV to be added in computing the ACB to the transferee.
Louise J. Roy
October 10, 2003
2003-003565
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