A private company (Aco) was the beneficiary and holder of a policy, on the life of Mr. X, with an adjusted cost basis (ACB), cash surrender value (CSV) and FMV of $50, $150 and $250, respectively. All of the common shares of Aco were held by a discretionary family trust (Trust X) of which Xco (a holding company controlled by Mr. X) was a capital and income beneficiary.
In the year immediately preceding that sale on January 1 of all the shares of Aco, Aco paid a dividend in kind of the policy to Trust X, so that the policy was deemed to be disposed of for the greatest of its ACB, CSV and the (nil) consideration received, or $150.
On December 31 of the same year, Trust X issued a promissory note to Xco for an amount equal to the policy FMV, with the promissory note then being repaid by the transfer of the policy by Trust X to Xco. Would s. 107(2) apply to such distribution of the Policy by Trust X to its beneficiary, Corporation X, in Year A2?
CRA indicated that s. 107(2) would not apply, stating:
Trust X would therefore repay a debt to its beneficiary by a payment in kind. Subsection 107(2) would not apply in those circumstances, since this would not be a situation where a distribution of trust property gives rise to a disposition of all or part of the beneficiary's capital interest in the trust. Rather, it would be a situation where a debtor repays its debt to its creditor.
Instead, s. 148(7) would deem the proceeds of disposition of the policy to the trust to be the FMV of the consideration received by the trust for the disposition, namely, the $250 note repayment.