CRA indicates that s. 98(2) generally prevails over s. 148(7)

Regarding the situation where a partnership held, was the beneficiary of, and paid the premiums for 10 years on, three policies on the lives of each of the three individuals who were its partners and then, pursuant to the partnership agreement, transferred the applicable policy to one of the partners on such withdrawal of “Individual C” from the partnership, CRA indicated:

[W]here the conditions of subsection 98(2) are satisfied, we are generally of the view that subsection 98(2) would override subsection 148(7) so that the partnership's proceeds of disposition of the life insurance policy would be the FMV of the policy.

Suppose that Individual C then donates the policy two years later to a registered charity. CRA indicated that the period of holding of the policy by the partnership would not count for purposes of the rule in s. 248(35), that the FMV of a gifted life insurance policy is deemed to be the lesser of its adjusted cost basis and actual FMV if the holding period by the donor is less than three (or, in some circumstances, 10) years.

Neal Armstrong. Summaries of 3 November 2023 APFF Financial Strategies Roundtable, Q.5 under s. 148(7) and s. 248(35).