The taxpayer wants the proceeds of the universal life insurance policy on his life paid on his death to his adult child, rather than to his spouse, who is the one under his will to inherit his common shares of the private corporation (the “Corporation”) that will be the policyholder and beneficiary.
To this end, the Corporation will issue for $1 a special non-voting share (the “insurance share") to the child that is non-participating except for an entitlement to a dividend (to be declared only after the taxpayer’s death) equaling the policy death benefit payable under the policy. The share also is retractable by the holder before the taxpayer's death, for the policy’s cash surrender value (“CSV”), but with payment deferred until the Corporation’s receipt of the death benefit, and is retractable by the holder (and redeemable by the Corporation) after the Corporation’s death for any excess of the death benefit over the dividend declared. The initial CSV is nil.
In 2005-0138111C6, CRA was asked to confirm that immediately before the taxpayer’s death, the policy’s CSV would not under s. 70(5.3) increase the fair market value of the common shares held by the taxpayer, since the CSV would be reflected in the redemption amount of the insurance share held by the child.
CRA indicated that it would be reasonable to allocate the CSV between classes of shares based on their respective share terms. Here, as the insurance share was retractable by the holder immediately before the death for the CSV, it would not be unreasonable to allocate the policy CSV to the insurance shares – so that the value of the common shares would not take the policy CSV into account.
CRA now confirmed that such comments “continue to apply to that identical fact situation” in regards to the specific common share valuation issue raised.