18 September 2025 Roundtable, 2025-1067961C6 - CLHIA 2025 – Q.6 – Transfer of a life insurance policy

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.

Principal Issues: Does subsection 148(7) apply where a corporation transfers a life insurance policy on the life of a senior executive officer who is also a shareholder for no consideration?

Position: Yes. Moreover, our prior positions on such transfers is updated in light of the 2016 amendments to subsection 148(7).

Reasons: The legislation and prior positions.

2025 CLHIA-CRA Roundtable

Question 6 - 148(7) and Addition to Transferee’s ACB

Background

Prior to March 22, 2016, subsection 148(7) (endnote 1) of the Act applied to certain dispositions of an interest in a life insurance policy, including a disposition by way of non-arm's length transfer, by way of gift and by way of distribution from a corporation, and deemed the proceeds of the disposition (PoD) to the disposing policyholder to be the value of the interest at the time of the disposition. Subsection 148(7) of the Act also deemed the cost of the interest to the acquiring policyholder to be an amount equal to the proceeds of the interest determined for the disposing policyholder. The term “value” is defined in subsection 148(9) of the Act to generally mean a policy’s cash surrender value (CSV).

In technical interpretation 9705125 dated April 16, 1997, the CRA opined that an adjustment to the adjusted cost basis (ACB) of a life insurance policy was permitted under element C of the definition of “adjusted cost basis” in subsection 148(9) of the Act when a shareholder is conferred a benefit arising from the transfer of a policy from a corporation for inadequate consideration. However, in such case, the CRA indicated it would be inappropriate for the addition of this amount to result in the ACB of the life insurance policy in the hands of the transferee exceeding the fair market value (FMV) of the policy.

In technical interpretation 2003-0004275 dated June 9, 2003, the CRA was presented with the following example based on the prior legislation described above:

A corporation is the owner and beneficiary of an insurance policy on the life of a senior executive officer, who is also a shareholder. The policy was acquired to provide key person coverage to indemnify the corporation for a potential loss of profits or additional costs that may be incurred in the event of death of the insured. The individual retires and the corporation no longer needs the policy. The corporation transfers the policy to the individual for no consideration. Immediately before the transfer, the details of the policy are as follows:

      Death benefit	      $	1,000,000
      Cash surrender value	$	  125,000
      Adjusted cost basis	$        50,000
      Fair market value	      $   	  125,000

The income tax implications of the transfer for the corporation and the individual, based on the above-described legislation in force in 2003, were described to the CRA as follows:

(i) Pursuant to subsection 148(7), the corporation is deemed to become entitled to receive PoD equal to the CSV of the policy (i.e. $125,000).

(ii) Pursuant to subsection 148(1), the corporation must include $75,000 in computing its income—the excess of the deemed PoD over the ACB of the policy. (i.e. $125,000 - $50,000).

(iii) Pursuant to either paragraph 6(1)(a) or subsection 15(1), the individual must include in income the FMV of the policy (i.e. $125,000).

(iv) Assuming that the policy was transferred by the corporation to the individual because of the individual's position as a senior executive of the company and not because the individual was a shareholder, the corporation would be entitled to a deduction in computing its income for an amount equal to the FMV of the policy (i.e. $125,000).

(v) Pursuant to subsection 148(7), the individual is deemed to acquire the policy at a cost equal to the CSV of the policy (i.e. $125,000).

(vi) Pursuant to the ACB definition in subsection 148(9), the ACB of the policy to the individual would include the cost of the policy as determined in (v) above and the amount included in computing the individual's income as determined in (iii) above. Accordingly, immediately after the transfer, the ACB of the policy to the individual would be $250,000 ($125,000 by virtue of the description of A and $125,000 by virtue of the description of C in the ACB definition in subsection 148(9)).

The CRA was asked whether they agree with the above-described income tax implications for the corporation and the individual. The CRA agreed with the tax implications set out in (i) to (v) above but disagreed with (vi).

With respect to (vi) above, the CRA opined that:

In a transaction where,

(a) subsection 148(7) applied to a transaction,

(b) the FMV of the policy exceeded the CSV of the policy and,

(c) the transferee was required to include an amount in income under subsection 15(1), in respect of the transfer,

then, the excess of FMV of the policy over its CSV would be allowed as an addition in computing the ACB of the policy to the transferee under variable C of the definition of ACB in subsection 148(9). Where the FMV and CSV of the policy are identical, there is no amount to be added to the ACB of the policy under variable C.

Subsection 148(7) of the Act was amended in 2016 (endnote 2) , applicable to dispositions after March 21, 2016. In this regard, under paragraph 148(7)(a) of the Act, where a policyholder disposes of an interest in a life insurance policy under subsection 148(7) after March 21, 2016, the policyholder is deemed to become entitled to receive, at the disposition time, PoD equal to the greatest of the

(i) value of the interest at the disposition time, defined in subsection 148(9) to generally mean the CSV;

(ii) FMV of any consideration given for the interest in the policy; and

(iii) ACB of the interest in the policy immediately before the disposition time.

Moreover, under paragraph 148(7)(b) of the Act, the person that acquires the interest because of the disposition is deemed to acquire it at a cost equal to such deemed PoD.

CLHIA would like to revisit the example above and CRA’s comments in the context of the 2016 amendments to subsection 148(7) of the Act and in particular, the ACB of the interest in the policy to the acquirer.

Questions

Part 1(a)

In the example above, where the interest in the life insurance policy is disposed after March 21, 2016 by the corporation to the individual shareholder under subsection 148(7) of the Act, it appears that the tax implications are as follows:

(i) Pursuant to paragraph 148(7)(a), the corporation is deemed to become entitled to receive PoD equal to $125,000 (the greatest of CSV – $125,000; FMV consideration – nil; and ACB – $50,000).

(ii) Pursuant to subsection 148(1), the corporation must include $75,000 in computing its income, the excess of the deemed PoD over the ACB of the policy ($125,000 - $50,000).

(iii) Pursuant to paragraph 148(7)(b), the individual shareholder is deemed to acquire the policy at a cost equal to the deemed PoD of the policy ($125,000).

(iv) Pursuant to subsection 15(1), the individual shareholder must include in income the FMV of the policy ($125,000).

(v) In accordance with CRA’s published position above, since the FMV and CSV of the policy are identical, there is no additional amount to be added to the ACB of the policy under variable C of the ACB definition in subsection 148(9).

Can the CRA confirm the income tax implications as described for the corporation and the individual?

CRA Response

Based on the facts set out in the question, we agree with the income tax implications as set out in (i) to (v) above.

Part 1(b)

If the policy was transferred by the corporation to the individual for no consideration because of the individual's position as a senior executive of the corporation and not because the individual was a shareholder, can the CRA confirm that

(i) Pursuant to paragraph 148(7)(a), the corporation is deemed to become entitled to receive PoD equal to $125,000 (the greatest of CSV – $125,000; FMV consideration – nil; and ACB – $50,000).

(ii) Pursuant to subsection 148(1), the corporation must include $75,000 in computing its income, the excess of the deemed PoD over the ACB of the policy ($125,000 - $50,000).

(iii) Pursuant to paragraph 148(7)(b), the individual is deemed to acquire the policy at a cost equal to the deemed PoD of the policy ($125,000).

(iv) Pursuant to paragraph 6(1)(a), the individual must include the FMV of the policy ($125,000) in income.

(v) The corporation would be entitled to a deduction in computing its income for an amount equal to the FMV of the policy ($125,000).

(vi) In accordance with CRA’s published position above, since the FMV and CSV of the policy are identical, there is no additional amount to be added to the ACB of the policy under variable C of the ACB definition in subsection 148(9).

CRA Response

Whether the transfer of an interest in a life insurance policy to an individual in their capacity as an employee or a shareholder is a question of fact. In the situation described in the question above, where the policy is transferred to the individual as a senior executive employee of the corporation, we agree with the income tax implications set out in (i) to (vi).

Part 2(a)

Consider the following variation of the above example of a disposition of an interest in a life insurance policy under subsection 148(7) of the Act after March 21, 2016 where the ACB of the policy is greater than the policy’s CSV.

A corporation is the owner and beneficiary of an insurance policy on the life of a senior executive officer, who is also a shareholder. The policy was acquired to provide key person coverage to indemnify the corporation for a potential loss of profits or additional costs that may be incurred in the event of death of the insured. The corporation was entitled to receive the CSV of the policy if it were to surrender the policy. The individual retires and the corporation no longer needs the policy. The corporation transfers the policy to the individual for no consideration. Immediately before the transfer, the details of the policy are as follows:

      Death benefit 			$ 1,000,000
      Adjusted cost basis 		$   100,000
      Cash surrender value 		$    50,000
      Fair market value 		$   125,000

In this example, where the interest in the life insurance policy is disposed after March 21, 2016 by the corporation to the individual shareholder under subsection 148(7) of the Act, it appears that the tax implications are as follows:

(i) Pursuant to paragraph 148(7)(a), the corporation is deemed to become entitled to receive PoD equal to $100,000 (the greatest of CSV – $50,000; FMV consideration – nil; and ACB – $100,000).

(ii) Pursuant to subsection 148(1), the corporation does not have a policy gain because the deemed PoD equals the ACB of the policy ($100,000 - $100,000).

(iii) Pursuant to paragraph 148(7)(b), the individual shareholder is deemed to acquire the policy at a cost equal to the deemed PoD of the policy ($100,000).

(iv) Pursuant to subsection 15(1), the individual shareholder must include in income the FMV of the policy ($125,000).

(v) In accordance with CRA’s above-noted published position, since the FMV of the policy exceeds its CSV, it appears that there will be an additional amount to be added to the ACB of the policy under variable C of the definition of ACB in subsection 148(9) equal to $75,000 ($125,000 - $50,000). Accordingly, immediately after the transfer, the ACB of the policy to the individual would be $175,000 ($100,000 by virtue of the description of A and $75,000 by virtue of variable C) which exceeds the FMV of the policy.

Can the CRA confirm the tax implications as described for the corporation and the individual?

CRA Response

Based on the facts set out in the question, we agree with the income tax implications as set out in (i) to (iv) above.

However, with respect to the determination of the ACB of the interest in the policy to the shareholder as described in (v) above, we disagree.

As a result of the 2016 amendments, in a transaction where,

a) subsection 148(7) applied to a transaction after March 21, 2016,

b) the FMV of the policy exceeds the deemed PoD determined under paragraph 148(7)(a) and,

c) the transferee was required to include an amount in income under subsection 15(1) or paragraph 6(1)(a), in respect of the transfer,

then, we would allow the addition of the excess of the FMV of the policy over the deemed PoD determined under paragraph 148(7)(a) in computing the addition to the ACB of the interest in the policy to the transferee under variable C of the ACB definition in subsection 148(9). Where the FMV and the deemed PoD determined under paragraph 148(7)(a) are identical, there is no amount to be added to the ACB of the interest in the policy under variable C of the ACB definition in subsection 148(9).

In the situation described in the question, the addition to the ACB of the interest in the policy under variable C would be $25,000 ($125,000 - $100,000). Accordingly, the ACB of the interest in the policy to the individual immediately after the transfer would be $125,000 ($100,000 + $25,000).

Part 2(b)

If the interest in the policy was transferred by the corporation to the individual because of the individual's position as a senior executive of the company and not because the individual was a shareholder, can the CRA confirm that

(i) Pursuant to paragraph 148(7)(a), the corporation is deemed to become entitled to receive PoD equal to $100,000 (the greatest of CSV – $50,000; FMV consideration – nil; and ACB – $100,000).

(ii) Pursuant to subsection 148(1), the corporation does not have a policy gain because the deemed PoD equals the ACB of the policy ($100,000 - $100,000).

(iii) Pursuant to paragraph 148(7)(b), the individual shareholder is deemed to acquire the policy at a cost equal to the deemed PoD of the policy ($100,000).

(iv) Pursuant to paragraph 6(1)(a), the individual must include the fair market value of the policy ($125,000) in income

(v) The corporation would be entitled to a deduction in computing its income for an amount equal to the fair market value of the policy ($125,000).

CRA Response

Whether the transfer of an interest in a life insurance policy to an individual in their capacity as an employee or a shareholder is a question of fact. In the situation described in the question above, where the interest in the policy is transferred to the individual as a senior executive employee of the corporation, we agree with the income tax implications set out in (i) to (v) above. Moreover, the addition to the ACB of the interest in the policy to the employee under variable C would be $25,000 ($125,000 - $100,000).

Part 3

Life insurance companies track the ACB of a life insurance policy according to the rules in section 148. The life insurance company may not be aware of the addition to the ACB for the taxable benefit arising from the transfer of a life insurance policy and issue a T5 reporting slip on a subsequent disposition which does not take into account the ACB adjustment arising from the taxable employer or shareholder benefits. Can the CRA comment on the reporting responsibilities of the insurer and policyholder with respect to non-arm’s length transfers of an interest in a life insurance policy?

CRA Response

Subsection 217(2) of the Income Tax Regulations (Regulations) requires an insurer that is the issuer of a life insurance policy to prepare and file an information return in prescribed form (a T5 information return consisting of the T5 slip(s) and the related T5 Summary) to report the amount that is required to be included in computing a policyholder's income under paragraph 56(1)(j) of the Act, in respect of a disposition of an interest in the policy if the insurer is a party to, or is notified in writing of, the disposition. It is our general understanding that many of the variables that comprise the ACB of an interest in a life insurance policy requires information that is available only in the accounts of the insurer.

The reporting requirements under subsection 217(2) of the Regulations would apply to a disposition described in subsection 148(7) as in the example described above since the insurer remains the issuer of the policy. Although not a party to the disposition, we would expect an insurer to be aware of any changes to the policyholder arising from a disposition of a life insurance policy to ensure that the policy continues to be in effect and make any necessary adjustments to the ACB as appropriate. However, the onus remains with the policyholder to properly report the income with respect to a disposition of an interest in a life insurance policy in accordance with the Act.

Karri-Lea Estabrooks
2025-106796
September 18, 2025

ENDNOTES

1 Unless otherwise stated, all references to a statute are to the relevant provision of the Income Tax Act R.S.C. 1985 (5th Supp.), c.1, as amended, (the Act), or, where appropriate, the Income Tax Regulations, C.R.C., c.945, as amended, (the Regulations)

2 2016, c. 12, s. 53, effective December 15, 2016