For the first nine years of a critical illness policy on the life of one of its shareholders, the corporation has been paying the premiums on the policy. As a result of the payment of an additional premium, the policyholder (the corporation) is entitled to a return of premiums on the policy maturity after 10 years. In the 10th year, the corporation assigns the insurance policy without consideration to the shareholder, who pays the premium due for the 10th year and then receives a full refund of all premiums paid during the term of the policy.
What are the tax consequences of transferring the policy? CCRA responded:
It is the CCRA's view that subsection 148(7) does not apply to the transfer of a critical illness policy that is an accident or sickness policy. However, a shareholder who acquires such a policy from the shareholder’s corporation for less than fair market value will be required by virtue of subsection 15(1) to include in computing income an amount equal to the excess of the fair market value of the critical illness policy over the consideration paid.
In determining the fair market value of such a policy, we are of the view that the age and health of the insured, the amount of refundable premiums and the amount of premiums paid at the date of transfer will be among the factors to consider.