Principal Issues: [TaxInterpretations translation] Would subsection 148(7) apply where a corporation whose capital stock is wholly owned by an individual transfers an interest in a life insurance policy of the individual to another corporation whose capital stock is wholly owned by that individual?
Position: Yes.
Reasons: In line with our previous position.
Financial Strategies and Financial Instruments Roundtable
2006 APFF CONFERENCE
Question 13
Policy transfers between related companies
Where a corporation transfers an interest in a life insurance policy of which it is the owner to an individual who is its sole shareholder, subsection 148(7) deems the disposition to be made by the corporation for proceeds of disposition equal to the value of the interest in the policy at the time of disposition. Where the interest in the life insurance policy includes an interest the cash surrender value of the policy, subsection 148(9) provides that the value of the interest in the life insurance policy is the cash surrender value.
Furthermore, CRA has confirmed in a technical interpretation that in such a situation, the shareholder transferee of such an insurance policy would be deemed to have received a benefit subject to subsection 15(1), with the amount of the benefit to be included in computing the shareholder's income being equal to the amount by which the fair market value of the interest in the life insurance policy exceeds the consideration paid, as applicable.
Question:
What about a situation where an individual is the sole shareholder of two corporations and an interest in a life insurance policy is disposed of by one of the corporations to the other?
CRA Response
We are of the view that subsection 148(7) would apply to the situation you have described since it is a situation where an interest of a policyholder in a life insurance policy would be disposed of to a person with whom the policyholder is not dealing at arm's length.
Furthermore, it is possible that the transferor corporation may be impoverished as a result of the transaction described above. In such a case, to the extent that it is shown that, under the terms of the transaction, the transferor corporation confers a benefit on the sole shareholder, subsection 15(1) would apply to require the individual to include in income the value of the benefit conferred.
Guy Goulet
(613) 957-9768
October 6, 2006
2006-019721