Opco, whose shares had always been held by Holdco, acquired an interest in a life insurance policy (the Policy) to insure the life of a shareholder of Holdco, was the owner of the Policy and paid the premiums on the Policy, of which a portion was the savings component that was reflected during this period in the cash surrender value of the Policy. The Policy was subsequently disposed of to Holdco and then, Holdco disposed of all the shares of Opco to an unrelated third party. The Directorate stated:
Opco must deduct in computing its safe income on hand attributable to the shares held by Holdco all amounts paid by it during the relevant calculation period as premiums under the Policy … . However, since the Policy has a cash surrender value … the portion of the premiums paid that did not reduce the gain inherent in the shares of the capital stock of Opco held by Holdco, that was not deducted in computing the net income of Opco pursuant to the Act, and that contributed to the increase in the cash surrender value of the Policy, should not be deducted in computing the safe income on hand of Opco attributable to the shares held by Holdco in the relevant period. Based on the information you have provided to us, this amount is equal to … the ACB of the Policy.