Principal Issues: [TaxInterpretations translation] What is the tax treatment of the valuation fees of a life insurance policy when transferring such a policy to a corporation where subsection 148(7) applies to the transfer?
Position: The valuation fees that a life insurance policy holder incurs or makes to dispose of the policy are not included in the calculation made under subsection 148(1). For the purchaser, the valuation fees incurred or made to purchase the policy are not included in the calculation of the adjusted cost basis of the policy.
Reasons: Subsection 148(7) determines the proceeds of disposition to the person who disposes of a life insurance policy and the adjusted cost basis to the person acquiring the policy. In addition, contrary to subsection 40(1), which specifies that the capital gain is reduced by selling expenses, such a provision does not exist in section 148.
FINANCIAL STRATEGIES AND FINANCIAL INSTRUMENTS ROUNDTABLE, 7 OCTOBER 2011
2011 APFF CONFERENCE
Question 10 - Valuation fees for a life insurance policy in connection with a transfer of the policy by a shareholder to the shareholder’s corporation
An individual is the policyholder of a life insurance policy that is an exempt policy for the purposes of the Act. When transferring that life insurance policy to the corporation of which the individual is the sole shareholder, it is very important to determine the fair market value of the life insurance policy at the time of the transfer. For this purpose, it is recommended that an actuary be retained, for example, to determine as accurately as possible the fair market value of the policy, so that neither party to the transaction is harmed, and no undesirable tax consequences result.
Questions to the CRA
i) Does the CRA consider it reasonable, in such a situation, that the valuation fees for the insurance policy be borne 50-50 between the transferor and the purchaser of the policy?
ii) Can the CRA specify the tax treatment of those fees to both the transferor and the purchaser?
CRA Response
The reasonableness of the apportionment of life insurance valuation fees between the shareholder and the corporation is a question of fact that can only be resolved after considering all relevant facts. The CRA has no specific requirements in that regard.
The provisions of subsection 148(7) apply where an interest of a policyholder in a life insurance policy is disposed of by way of a 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. In those circumstances, the policyholder is deemed to become entitled to receive proceeds of disposition equal to the value of the interest at the time of disposition, and the person who acquires the interest by virtue of the disposition is deemed to acquire it at a cost equal to that value.
The term "value" is defined in subsection 148(9) and applies for the purposes of section 148. According to that paragraph, the value at a particular time of an interest in a life insurance policy means
(a) where the interest includes an interest in the cash surrender value of the policy, the amount in respect thereof that the holder of the interest would be entitled to receive if the policy were surrendered at that time, and
(b) in any other case, nil.
By virtue of 148(1), a policyholder must include any excess of the proceeds of disposition of the policyholder’s interest in the policy, which, in this case, is the value of the policyholder’s interest in the policy over the adjusted cost basis of that interest immediately before the disposition.
Michel Lambert
(613) 957-8968
2011-040835