Holdco, which was the holder and beneficiary of a life insurance policy on the life of its sole shareholder, transferred the policy to him as a dividend in kind. The adjusted cost basis (“ACB”), cash surrender value and fair market value (“FMV”) of the policy were $200,000, $240,000 and $450,000, respectively. Would the proceeds of disposition of the policy be determined on the basis that no consideration was given for the transferred policy? CRA responded that s. 148(7)(a) applied to deem Holdco:
to have become entitled to receive proceeds of disposition equal to $240,000 (the greater 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… . Mr. X… would be deemed to acquire his interest in the policy for $240,000. In addition, pursuant to… 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).
…[T]he 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. … We have brought this situation to the attention of the Department of Finance.