An individual is the owner of, and the insured under, a whole life insurance policy having an adjusted cost basis of $45,000, a cash surrender value (“CSV”) and "value" (as defined in s. 148(9)) of $140,000, and a fair market value ("FMV") of $450,000. The individual transfers the policy to a wholly-owned corporation in consideration for two demand notes in respective amounts equalling the CSV, and the FMV excess over the CSV (i.e., $310,000).
Respecting the consequences of the transfer, CRA noted that s. 148(7) would apply “because the proposed transfer would be to a person (a holding corporation) with whom the individual does not deal at arm's length,” and stated:
Consequently, the individual would be deemed to be entitled to receive proceeds of disposition equal to the "value" of $145,000, and the corporation would be deemed to acquire the life insurance policy at a cost equal to that value.
In addition, in the situation presented, the individual would be required to include an amount of $95,000 by virtue of subsection 148(1) in computing income for the taxation year in which the transfer takes place.