26 August 1980 Income Tax Severed Letter

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.

M.E. Bartley Tel. (613) 995-0051

August 26, 1980

Dear XXXX

We reply to your letter of July 15 regarding subsection 148(7) of the Income Tax Act.

If, as you have stipulated, a particular life insurance contract has a cash surrender value, its value for the purposes of subsection 148(7) of the Income Tax Act will be determined by subparagraph 148(9)(g)(i). That is, the amount of proceeds to the corporation which disposes of the contract to a shareholder and the cost of the contract to the shareholder are equal to the cash surrender value of the contract at that time. "Cash surrender value" has the meaning assigned by paragraph 148(9) (b) of the Act. Accordingly we confirm your assumption. We also agree that para- graph 13 of Interpretation Bulletin IT-87 , Policyholders' Income from Life Insurance Policies, suggests that subsection 148(7) of the Act applies only to dispositions which are not at arm's length. The bulletin is under revision and that paragraph will be amended to bring it into line with the subsection.

Subsection 148(7) of the Act applies where a corporation transfers a life insurance policy to a shareholder for no consideration but in our opinion that does not prevent the concurrent application of subsection 15(1) of the Act. The value of the policy for the purposes of subsection 15(1) is its fair market value which may or may not be equal to the "value" defined by paragraph 148(9)(g) of the Act for the purposes of section 148. Fair market value for the purposes of subsection 15(1) of the Act would be an amount which is not less than the total amount the shareholder might receive at that time if he surrendered the policy and received its net value plus accu- mulated dividends and interest. Other factors may produce a value greater than that total and, in particular, the obvious imminence of the death of the person insured would certainly cause the fair market value of the policy to exceed that amount. The cost of the policy to the share- holder is, as you have noted, an amount determined under subsection 148(7) of the Act. It is possible to visualize a set of circumstances in which this may produce an inequitable result to the shareholder but in our opinion it is unlikely that one of these will occur.

We confirm that a life insurance policy which was held by a deferred profit sharing plan and is transferred to a beneficiary is considered to have a value equal to the greater of

(a) the aggregate of the premiums paid for the policy, and

(b) the aggregate of its cash surrender value and the accumulated dividends thereon.

This is confirmed in the context of registered retirement savings plans, in Interpretation Bulletin IT-415R , Deregistration of Registered Retirement Savings Plans.

Yours truly,

for Director Non-Corporate Rulings Division

MEB/mn 15(1) 147(10) 148(7)