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Principal Issues: On a transfer of an interest in a life insurance policy by way of a dividend in kind after March 21, 2016, what will be the proceeds of the disposition that the transferor will be deemed to become entitled to receive?
Position: The transferor will be deemed to become entitled to receive proceeds of the disposition generally equal to the greatest of the cash surrender value of the interest at the time of the transfer and the ACB of the interest to the transferor immediately before the transfer.
Reasons: The recipient of the dividend in kind will not be considered to have given consideration for the interest.
XXXXXXXXXX 2016-067173
Mélanie Beaulieu
June 7, 2017
Dear Sir,
Subject: Disposition of an interest in a life insurance policy through a dividend in kind
This letter is in response to your e-mail of October 15, 2016, regarding the rules respecting the transfer of an interest in a life insurance policy under subsection 148(7) of the Income Tax Act (the “Act"). (Footnote 1) Unless otherwise indicated, all legislative references in this letter are to the provisions of the Act.
Specifically, you wish to determine the proceeds of disposition which a corporation, holding an interest in a life insurance policy, would be deemed to become entitled to receive under subsection 148(7) where such interest was disposed of after March 21, 2016 in connection with the payment of a dividend in kind by the corporation to its sole shareholder, an individual. In this regard, you wish to confirm that in such a situation we would consider that no consideration was given for the interest and that, therefore, the proceeds of disposition that the corporation would be deemed to become entitled to receive would be equal to the greater of the cash surrender value and the adjusted cost basis ("ACB") of the interest in the policy.
You described a situation in which Holdco, a corporation whose sole shareholder is Mr. X, was the policyholder and beneficiary of a life insurance policy of which the insured was Mr. X. Holdco wished to distribute its interest in the policy to Mr. X. To that end, Holdco declared a dividend, which was payable in kind through an assignment of its interest in the life insurance policy. At that time, the fair market value ("FMV") of Holdco’s interest in the policy was $450,000 and its cash surrender value was $240,000. Immediately before that time, the ACB of the interest in the policy to Holdco was $200,000.
Our Comments
This technical interpretation provides general comments on the provisions of the Act and related legislation, where referenced. It does not confirm the income tax treatment of a particular situation involving a specific taxpayer but is intended to assist you in making that determination. The income tax treatment of particular transactions proposed by a specific taxpayer will only be confirmed by this Directorate in the context of an advance income tax ruling request submitted in the manner set out in Information Circular IC 70-6R7, Advance Income Tax Rulings and Technical Interpretations.
The provisions of subsection 148(7) apply where an interest of a policyholder in a life insurance policy is disposed of by way of gift, by distribution from a corporation or by operation of law only to any person, or in any manner whatever to any person with whom the policyholder was not dealing at arm’s length. Where subsection 148(7) applies to a disposition that occurs after March 21, 2016, the policyholder is deemed to be entitled to receive proceeds of disposition equal to the greatest of (i) the value of the interest at the disposition time, (ii) the FMV of any consideration given for the interest and (iii) the ACB to the policyholder of the interest immediately before the disposition time. A person who acquires the interest as a result of the disposition is deemed to acquire the interest at a cost equal to that amount. The term "value" is defined in subsection 148(9) and generally refers to the cash surrender value of the policy where the interest includes an interest in the cash surrender value of the policy.
Paragraph 12(1)(j) provides inter alia that a taxpayer must include, in computing the taxpayer’s income for a taxation year, any amount of a dividend in respect of a share of the capital stock of a corporation resident in Canada that is required to be included under subsection 82(1). Generally, this subsection provides that a person who receives a taxable dividend from a corporation resident in Canada must include, in computing the person’s income, the amount received, plus a gross-up amount, if applicable. The value to be given to a dividend, other than a stock dividend, that a corporation pays in the form of non-cash assets (a dividend in kind) is equal to the FMV of those assets at the date of payment or transfer to the shareholder. Where the shareholder is an individual, the gross-up under paragraph 82(1)(b) applies and must be added to the dividend to be included in computing the shareholder's income. This shareholder may also deduct in computing his or her taxes a dividend tax credit under section 121.
In the situation described, the distribution by Holdco of its interest in the policy through a dividend in kind is a disposition to which subsection 148(1) applies. The gain respecting the disposition of the interest in the policy that Holdco is required to include in computing its income under subsection 148(1) is the amount, if any, by which the proceeds of the disposition of its interest in the policy that Holdco became entitled to receive exceeds the ACB of that interest immediately before the disposition. In this regard, paragraph 148(7)(a) would apply so as to result in Holdco being deemed to have become entitled to receive proceeds of disposition equal to $240,000 (the greatest of (i) the cash surrender value of the interest ($240,000), (ii) the FMV of any consideration for the interest (N/A), and (iii) the ACB of the interest to Holdco ($200,000).) The result would be a gain to Holdco of $40,000 on its disposition of its interest in the policy. As for Mr. X, he would be deemed to acquire his interest in the policy for $240,000. In addition, pursuant to paragraph 12(1)(j) and subsection 82(1), Mr. X should include in his income an amount equal to the FMV of the interest in the policy ($450,000), but as increased in accordance with paragraph 82(1)(b).
Since the cash surrender value of the interest was, at the time of the disposition, higher than the ACB of the interest to Holdco immediately prior to the disposition, the transfer could not be made without immediate tax consequences. However, since the cash surrender value of the interest at the time of disposition was less than its FMV, the gain on the disposition of the interest in the policy that Holdco must include in computing its income is less than that which it would have been required to include had it instead sold its interest to Mr. X at its FMV. Although the ACB of Mr. X's interest in the policy would be lower than its FMV, it is not clear that the result described above is consistent with tax policy. We have brought this situation to the attention of the Department of Finance.
We hope that our comments will be of assistance.
Louise J. Roy, CPA, CGA
Manager
for the Director
Financial Industries and Trusts Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch
FOOTNOTES
Due to our system requirements, footnotes contained in the original document are reproduced below:
1 Your request referred to the amendments to subsection 148(7) as proposed in the July 29, 2016 Legislative Proposals Relating to Income Tax, Sales Tax and Excise Duties. These amendments have, for all relevant purposes of this letter, been set out in S.C. 2016, c. 12, sect. 53.
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