Principal Issues: [TaxInterpretations translation]
Does subsection 148(7) of the Act apply where a corporation transfers a life insurance policy to the insured who is a shareholder or an arm's length employee, for proceeds of disposition equal to the FMV of the insurance policy at the time of the transfer?
Position: No
Reason:
Subsection 148(7) applies to transfers to a person with whom the policyholder does not deal at arm's length and to transfers by way of gift, distribution by a corporation or by operation of law to a person. Where a shareholder or employee and the corporation deal at arm's length and pay consideration equal to FMV to acquire the policy, it is our view that such a transfer is not considered to be disposed of by way of gift, by way of distribution by a corporation or by operation of law.
FINANCIAL PRODUCTS ROUNDTABLE
APFF - CONFERENCE 2003
Question 4
Assignment of a life insurance policy
If a corporation holding a life insurance policy on the life of a shareholder with whom it deals at arm's length transfers the policy to that shareholder for consideration equal to the fair market value of the policy, which exceeds its cash surrender value, would the application of ITA subsection 148(7) deem the transfer to have occurred at the cash surrender value? Would the answer be the same if the corporation held a life insurance policy on the life of an employee with whom it dealt at arm's length and transferred it to that employee for consideration equal to its fair market value?
CRA Response
The transfer by a corporation of a life insurance policy to a shareholder or employee who deals at arm's length with the transferor for proceeds equal to the fair market value of the policy is not a "distribution" for purposes of subsection 148(7). However, it should be noted that it is a question of fact whether or not a shareholder or employee is dealing at arm's length with a corporation so as to render relevant a determination as to whether the transfer of the policy would be a "distribution" by the corporation.
Louise J. Roy
October 10, 2003
2003-003566