A corporation holding a life insurance policy on the life of a shareholder receives a policy loan in an amount equal to the full cash surrender value (CSV) of $1 million, which it invests in marketable securities. Pursuant to s. 70(5.3), in determining the FMV of the deceased's shares, the FMV of the policy is its CSV under s. 148(9), which is to be determined without regard to any policy loans – so that such policy’s FMV would be equal to the full FMV of $1 million. However, the FMV of the corporation's other assets will include the $1 million of marketable securities. Will the policy loan be deducted as a liability in determining the shares’ FMV? CCRA responded:
Subsection 70(5.3) specifies that the FMV of the life insurance policy that is to be used in determining the FMV of the deceased's shares is the FMV of that policy within the meaning of subsection 148(9). Consequently, in determining the FMV of the policy as an asset of the corporation, the unpaid amount of a policy loan immediately before the death of the individual on whose life the insurance was purchased is to be ignored. In determining whether the policy loan is otherwise relevant to the determination of the FMV of the deceased individual's shares for purposes of subsection 70(5), the principles that normally govern the valuation process would be applied.