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 that year, Trust X then distributed the policy to Xco as a dividend pursuant to ss. 104(6) and (13), and made a s. 104(19) designation.
Regarding the distribution by Trust X, would s. 106(3) prevail over s. 148(7), so that the policy would be deemed to have been disposed of for its FMV?
CRA indicated that where the amount paid was of income under the applicable private law, then s. 106(3) could apply to deem a disposition of the policy for its FMV.
CRA considers that where a trust transfers the policy to its beneficiary, the beneficiary is regarded as giving consideration for the transfer that is all or any part of the beneficiary's income or capital interest, as applicable. Here, it would be reasonable to consider that such consideration had an FMV of $250.
Thus, it made no difference which of s. 106(3) and s. 148(7) prevailed over the other.