As a result of employee B no longer being considered to be a key employee, her employer (Corporation A) transfers its “key person” permanent life insurance policy on her life to her for nominal consideration. At the transfer time, the death benefit, cash surrender value and ACB are $1 million, $50,000 and $20,000, respectively. The policy FMV equals its CSV.
Does the transfer engage s. 6 or 148(7) or in Corporation A having to report a gain on disposition of the policy? After finding that s. 6(1)(a) applied to the employee and that s. 148(7) applied to the transfer, CRA stated:
Under paragraph 56(1)(j) and subsection 148(1), Corporation A would report a policy gain of $30,000. This policy gain is computed as the greatest of the three amounts described in paragraph 148(7)(a), which would be the CSV of $50,000, less the ACB of the policy of $20,000. …
Under paragraph 148(7)(b), Employee B will be deemed to have acquired the policy at a cost of $50,000 (which is the amount determined under paragraph 148(7)(a)).