The will of Mr. Donor provided for a gift of his life insurance policy on the life of his daughter to a private foundation. On his death, the policy had a cash surrender value (CSV), adjusted cost basis (ACB) and fair market value (FMV) of $200,000, $50,000 and $500,000, respectively. This gift was made by his graduated rate estate within three years of his death. Does this gift generate a gain under s. 148(7) of $150,000 (being the CSV excess over ACB)? CRA responded:
To the extent that the $200,000 CSV represents the "value" of the interest within the meaning of subsection 148(9), Mr. Donor will be deemed to have become entitled to receive proceeds of disposition equal to $200,000 (the greatest of (i) the value of the interest to Mr. Donor ($200,000), (ii) the FMV of the consideration given for the interest ($0) and (iii) the ACB of the interest to Mr. Donor ($50,000)). …[A] gain of $150,000 … in respect of the disposition of … the policy should be included in computing his income for the taxation year of his death … .