CALU ANNUAL MEETING
May 11, 1992
Question 3
VALUE OF LIFE INSURANCE POLICY
Where an interest in a life insurance policy is transferred from an employer to an employee or from a corporation to a shareholder, how will the Department value the interest in the life insurance policy for purposes of determining:
(a) the proceeds of disposition to the transferor,
(b) the value of any benefit conferred on an employee or shareholder; and
(c) the adjusted cost basis to the transferee?
Department's position
Pursuant to subsection 148(7) of the Act, where an interest in a life insurance policy is disposed of by way of a gift, by distribution from a corporation, or by operation of law only to any person, or in any manner whatever to any person with whom the policyholder was not dealing at arm's length, the policyholder is deemed to receive proceeds equal to the value of the interest at the time of disposition, and the person acquiring the interest is deemed to acquire it at a cost equal to such value. The term value for these purposes is defined in paragraph 148(9)(g) of the Act.
The provisions of paragraph 6(1)(a) of the Act and subsection 15(1) of the Act will include in the income of the employee or shareholder, as the case may be, the amount by which the fair market value of the policy, which may be an amount different from the the value as defined in paragraph 149(9)(g) of the Act, exceeds the amount paid by the transferee for the policy. The amount so included in income will be added to the adjusted cost basis of the interest in the policy to the transferee under subparagraph 148(9)(a)(iii) of the Act.
Factors to be considered in determining the fair market value of an interest in a life insurance policy are set out in paragraphs 40 and 41 of Information Circular 89-3.
Author: T. Murphy