2020-0842191C6 CALU 2020 - Q5 - Jointly owned policies - 70(5.3)

Principal Issues: Can the CRA confirm the fair market value of the policy to a corporation as determined by subsection 70(5.3) is the cash surrender value pursuant to the co-ownership agreement?

Position: Unable to comment.

Reasons: Question of fact.

Author: Danis, Sylvie
Section: 70(5.3)

2020 CALU CRA Roundtable – July 2020

Question 5 – Jointly Owned Policies and subsection 70(5.3)

Background

Subsection 70(5.3) of the Act is a special valuation rule that applies to life insurance policies in circumstances where property is deemed to be disposed of by virtue of subsection 70(5), subsection 104(4) and section 128.1.  Specifically, it provides that where certain deemed dispositions of property occur as a result of the death, immigration or emigration of an individual, in determining the fair market value (FMV) of property, the FMV of certain life insurance policies is deemed to be equal to the cash surrender value (CSV) as defined in subsection 148(9).  For example, if an individual dies holding all of the shares of a private corporation, in determining the FMV of the shares for purposes of subsection 70(5), the FMV of any life insurance policy owned by the corporation on the life of the shareholder (or any other individual not dealing at arm’s length with the particular individual at that time or when the policy was issued) will be deemed to be the CSV of the policy.

There is some uncertainty as to how the rule in subsection 70(5.3) will apply where there is more than one owner of the life insurance policy. Consider the following situation:

Opco and A, the sole shareholder of Opco, jointly acquire a universal life insurance policy on the life of A (the “policy”).  The death benefit payable under the policy is equal to $1 million plus an amount equal to the fund value of the policy immediately before A’s death.  Opco and A enter into a co-ownership agreement (the “agreement”) under which Opco is entitled to the $1 million face amount on the death of A and agrees to pay the annual cost of insurance charges under the policy.  The agreement further provides that A is entitled to make additional deposits into the policy (subject to the exempt test accumulation limits) and can designate who is entitled to the death benefit equal to the fund value of the policy.  A is also entitled to the CSV of the policy should it be terminated prior to death.

Assume that A dies at a time when the fund value (and CSV) of the policy is equal to $200,000.  As a consequence, Opco receives a death benefit payment of $1 million and A’s estate receives a death benefit payment of $200,000.

Question

Based on the example above, can the CRA confirm that the FMV of the life insurance policy as determined by subsection 70(5.3) is $200,000?  Can the CRA also confirm that the FMV of Opco’s interest in the policy is nil as it has no interest in the CSV pursuant to the co-ownership agreement?

CRA Response

Subsection 70(5.3) of the Act provides that, for the purposes of subsections 70(5) and 104(4), as well as section 128.1, the fair market value (FMV) of a capital property that is deemed to have been disposed of as a consequence of a particular individual’s death or as a consequence of the individual becoming or ceasing to be resident in Canada shall be determined as if the FMV of a life insurance policy, under which the particular individual (or any individual not dealing at arm’s length with the particular individual at the time of the deemed disposition or at the time the policy was issued) was the insured life under the policy, was its cash surrender value (CSV) as defined in subsection 148(9) of the Act. One of the purposes of subsection 70(5.3) of the Act is to ensure that life insurance proceeds payable as a consequence of death are not reflected in the value of capital property (such as shares) and, accordingly, not reflected in a deemed capital gain on death.

In the scenario described above, subsection 70(5.3) of the Act applies such that the FMV of the life insurance policy is its CSV for purposes of determining the value of Opco’s shares held by A immediately before A’s death.

However, where a life insurance policy is jointly-held between a corporation and another taxpayer, subsection 70(5.3) of the Act does not specify the allocation of the CSV of the life insurance policy between separate interests or different policyholders in the policy, nor does the provision determine the value of the respective interests held by joint owners of a life insurance policy.

Consequently, we cannot definitively conclude that the FMV of the interest in the life insurance policy to Opco will be nil. The terms and conditions of the shared ownership arrangement, the specific life insurance contract and all other related agreements which may form part of the particular arrangement and the particular facts at the given time would have to be considered in the determination of the FMV of Opco’s interest in the life insurance policy.

In summary, it is the CRA’s long-standing position that it cannot express an opinion on FMV without an exhaustive review of the property to be valued at any given time. The CRA does not advocate an exclusive valuation method. The CRA does not have its own method for computing the FMV; this computation is based upon the facts known on the valuation date, to which the principles and standards of the Canadian Institute of Chartered Business Valuators are applied.

Sylvie Danis
July 8, 2020
2020-084219

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