16 April 1997 External T.I. 9705125 - NAL TRANSFER OF AN 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.

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

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

Principal Issues:

Application of subsection 148(7) of the Act where actual POD exceed deemed POD - Is there a benefit?

Position:

General comments only.

Reasons:

Under review with Finance.

XXXXXXXXXX 970512

Attention: XXXXXXXXXX

April 16, 1997

Dear Sirs:

Re: Non-arm's Length Transfer of an Interest in a Life Insurance Policy

This is in reply to your letter dated February 10, 1997, wherein you requested our views on the income tax implications under the Income Tax Act (the "Act") that may arise from the transfer of the ownership of a life insurance policy. Your letter sets out various examples of situations involving the transfer of a life insurance policy on the life of a sole shareholder from the shareholder to the corporation, from the corporation to the shareholder and between corporations owned by the shareholder.

As you noted, the Department has previously stated that where a shareholder acquired an interest in a life insurance policy from a corporation for consideration that was less than the fair market value ("fmv") of the policy, the excess of the fmv over the consideration paid by the shareholder, if any, would be included in the shareholder's income pursuant to subsection 15(1) of the Act. Since subsection 148(7) of the Act provides that the cost of the policy to the shareholder will be an amount equal to the cash surrender value ("csv") of the policy, it seemed reasonable that the shareholder be entitled to include the excess of the fmv over the csv of the policy that was included in the shareholder's income under subsection 15(1) of the Act in the calculation of the adjusted cost basis ("acb") of the policy. While arguably a somewhat liberal interpretation, we took the view that such an adjustment was permitted by C of the definition of acb in subsection 148(9) of the Act. It seems rather inappropriate that an interpretation intended to provide an equitable result under the Act should be extended to apply to situation where a shareholder acquires an interest in a policy from a corporation for no consideration and argues that the full amount of the subsection 15(1) income inclusion (i.e., the fmv of the policy), rather than the excess as described above, be added to an acb of the policy. Such an interpretation would give the shareholder an acb in the policy equal to twice the fmv of the policy as was suggested in one of your examples.

Accordingly, without further consideration we are unable to express a view as to the income tax consequences determined by you with regard to the various scenarios set forth in your letter. We can advise you that we have undertaken, in conjunction with our colleagues at the Department of Finance, to conduct a review of the income tax consequences that are obtained in transactions that are subject to subsection 148(7) of the Act and the interplay between this subsection and various other provisions of the Act.

Once this review is completed we will advise you of the outcome.

Yours truly,

Section Chief
Financial Institutions Section
Financial Industries Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch