Principal Issue: [TaxInterpretations translation]
Must a shareholder include a benefit in income if a corporation transfers a critical illness policy that is an accident and sickness policy to the individual without consideration?
Position:
Yes, for an amount equal to the FMV of the policy.
Reason:
The transfer is subject to subsection 15(1) of the Act.
FINANCIAL PRODUCTS ROUNDTABLE
APFF - CONFERENCE 2003
Question 7
Transfer of a critical illness policy
A private corporation acquires a critical illness policy on the life of one of its shareholders. The benefit is payable to the policyholder. The policy has a term of 10 years. The corporation chooses to take the "return of premium" option at maturity and, accordingly, pays an additional premium. This option entitles the corporation to a full refund of all premiums paid during the policy period if no claim has been made.
The corporation pays the premiums for nine years. In the 10th year, the corporation assigns the insurance policy to the shareholder without consideration. The shareholder pays the premium due for the 10th year. At the end of the 10th year, the shareholder receives a full refund of all premiums paid during the term of the policy.
Assuming the policy is a sickness or accident policy, what are the tax consequences of transferring the policy?
CCRA Response
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.
Louise J. Roy
October 10, 2003
2003-003686