Principal Issues: [TaxInterpretations translation] Does a shareholder have to include a benefit in income if a corporation transfers an interest in a life insurance policy to him without consideration?
Position: Yes, for an amount equal to the FMV of the interest.
Reasons: The transfer is subject to section 15(1).
XXXXXXXXXX 2005-011094 Michel Lambert, CA, M.Fisc. April 4, 2005
Dear Sir,
Subject: Transfer of a life insurance policy
This is in response to your letter of January 11, 2005, asking whether it is possible to transfer an interest in a life insurance policy to a shareholder if a corporation is both the owner and beneficiary. The life insurance policy is a paid-up policy without a cash surrender value. Our response reflects our telephone conversation of March 18, 2005 (XXXXXXXXXX/Lambert).
Unless otherwise indicated, all statutory references herein are to provisions of the Income Tax Act (the "Act").
As stated in paragraph 22 of Information Circular 70-6R5 dated May 17, 2002, it is our practice not to issue a written opinion regarding proposed transactions otherwise than by advance rulings. Furthermore, when it comes to determining whether a completed transaction has received appropriate tax treatment, that determination is made first by our Tax Services Offices as a result of their review of all facts and documents, which is usually performed as part of an audit engagement. However, we can offer the following general comments that we hope may be helpful to you. These comments may not, however, apply to your particular situation in certain circumstances.
The provisions of subsection 148(7) apply where an interest of a policyholder in a life insurance policy is disposed of by way of a gift, by distribution from a corporation or by operation of law only to any person, or in any manner whatever to any person with whom the policyholder was not dealing at arm’s length. Those provisions provide that the policyholder is deemed to become entitled to receive proceeds of the disposition equal to the value of the interest at the disposition time, and the person who acquires the interest because of the disposition shall be deemed to acquire it at a cost equal to that value. The term value is defined in subsection 148(9) and applies to section 148 and paragraph 56(1)(d.1). Where a life insurance policy includes an interest in the cash surrender value, the value of the interest in such a policy means the amount of the cash surrender value at a particular time that the owner would be entitled to receive if the policy were surrendered at that time. In other cases, the cash surrender value of such an interest is nil.
Consequently if there is no cash surrender value, the corporation will not be required to include an amount in its income as a result of the disposition of its interest in the life insurance policy.
The acquisition by a shareholder of an interest in a life insurance policy for less than the fair market value (FMV) of that interest will be subject to the provisions of subsection 15(1). Subject to certain exceptions, subsection 15(1) provides that the value of a shareholder benefit conferred by a corporation in a taxation year is included in computing the income of the shareholder for the year. That subsection does not provide an exception for benefits arising from the transfer of an interest in a life insurance policy. The amount of the benefit to be included in computing the shareholder's income will be equal to the excess of the FMV of the interest in the life insurance policy over the consideration paid, as the case may be.
The FMV of an interest in a life insurance policy is not generally equivalent to its cash surrender value. The age and health of the insured, the value of the accumulation fund, the cash surrender value and the amount of premiums paid at the date of transfer are all factors to be considered in determining the FMV. These are discussed in detail in paragraphs 40 and 41 of Information Circular 89-3. This circular is available on the Agency's website at http://www.cra-arc.gc.ca/E/pub/tp/ic89-3/READ-ME.html.
With respect to the adjusted cost basis (ACB) of the life insurance policy within the meaning of that term in subsection 148(9), the amount of the cash surrender value deemed to be the cost of the interest in the life insurance policy by virtue of subsection 148(7) will be included in the ACB calculation. In addition, we agree that the amount by which the FMV of the interest in the policy included in income under subsection 15(1) exceeds the cash surrender value will be included in the ACB calculation. Consequently, the ACB of the life insurance policy interest for the shareholder following the transfer should be equal to the FMV of that interest.
As stated in Information Circular 70-6R5, this opinion is not an advance income tax ruling and is not binding.
Best regards,
Section Manager
for the Director of the Directorate
Financial Industries Division
Income Tax Rulings Directorate
Policy and Planning Branch