Principal Issues: Roundtable Question 2 deals with two scenarios and asks for CRA's views on the application of subsection 148(7) in those scenarios. The first scenario deals with the transfer of a corporate owned life insurance policy to a former shareholder of the corporation. We were asked whether the transfer would be considered to take place at non-arm's length such that subsection 148(7) applies. The second scenario deals with the transfer of a life insurance policy from an employer to a non-shareholder employee. We were asked whether subsection 148(7) and paragraph 6(1)(a) would apply to the transfer and what the tax implications would be to the employer and the employee.
Position: For the first issue - whether parties are dealing at arm's length is a question of fact. We also caution that if the purpose for structuring a transaction in a particular manner is to avoid the application of a subsection 15(1) benefit, we would need to consider the possible application of subsection 245(2) or 246(1). For the second issue - we confirm that subsection 148(7) and paragraph 6(1)(a) would generally apply to the situation described. The employer would realize a policy gain in this case by the excess of the CSV of the policy over the ACB of the policy at the time of the transfer. The employee would have an employment benefit under paragraph 6(1)(a) equal to the excess of the FMV of the policy at that time, over the amount of any consideration paid by the employee for the policy.
Reasons: For the first issue - Under subsection 251(2), whether two unrelated parties are dealing at arm's length is a question of fact. All of the facts relevant to a particular situation would need to be considered before determining whether parties to the transaction were dealing at arm's length. For the second issue, the application of subsection 148(7) and paragraph 6(1)(a) when a policy is transferred from an employer to a non-shareholder employee is a position we have taken in the past and remains our position.