Mr. A owns all the issued and outstanding shares of Corporation 1 and Corporation 2 (making them sister corporations). Corporation 1 has a universal life insurance policy with a total death benefit of $2,000,000, and a cash surrender value of $500,000 and has named Corporation 2 as the beneficiary of the entire insurance benefit. Corporation 1 is wholly owned by Mr. A and Corporation 2 is either wholly-owned by Mr. A as well or has Mr. A as the holder of freeze preferred shares and a family trust as the holder of its common shares. When asked to comment on s. 70(5.3), CRA stated:
[S]ubsection 70(5.3) would therefore only have the effect of fixing the fair market value of Mr. A's life insurance policy at its cash surrender value (within the meaning of subsection 148(9)) for the purpose of determining the fair market value of the shares held by Mr. A immediately before his death. Subsection 70(5.3) does not, however, specify the impact of the value of the life insurance policy on the value of the property held by a taxpayer immediately before the taxpayer’s death, nor does it specify how that value is to be allocated among different properties or different classes of shares whose value depends on the life insurance proceeds, if any. The issue of determining the fair market value of shares owned by a person immediately before death and how to allocate the fair market value of a life insurance policy among different classes of shares is a question of fact … .