Budget Implementation Act, 2016, No. 2 (S.C. 2016, c. 12)

Marginal note:Disposition at non-arm’s length and similar cases

(7) If an interest of a policyholder in a life insurance policy is, at any time (referred to in this subsection as the disposition time), disposed of (other than a disposition under paragraph (2)(b)) 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,

• (a) the policyholder is deemed to become entitled to receive, at the disposition time, proceeds of the disposition equal to the greatest of

  • (i) the value of the interest at the disposition time,

  • (ii) an amount equal to

    • (A) if the disposition time is before March 22, 2016, nil, and

    • (B) if the disposition time is after March 21, 2016, the fair market value at the disposition time of the consideration, if any, given for the interest, and

  • (iii) an amount equal to

    • (A) if the disposition time is before March 22, 2016, nil, and

    • (B) if the disposition time is after March 21, 2016, the adjusted cost basis to the policyholder of the interest immediately before the disposition time;

• (b) the person that acquires the interest because of the disposition is deemed to acquire it, at the disposition time, at a cost equal to the amount determined under paragraph (a) in respect of the disposition;

• (c) in computing the paid-up capital in respect of each class of shares of the capital stock of a corporation at any time at or after the disposition time there shall be deducted the amount determined by the formula

  (A − B × C/D) × E/A

  where

  A

  is the increase, if any, as a result of the disposition, in the paid-up capital in respect of all the shares of the capital stock of the corporation,

  B

  is the amount determined under paragraph (a) in respect of the disposition,

  C

  is

  • (i) if consideration is given for the interest, the fair market value at the disposition time of consideration that is shares of the capital stock of the corporation given for the interest, and

  • (ii) if no consideration is given for the interest, 1,

  D

  is

  • (i) if consideration is given for the interest, the fair market value at the disposition time of the consideration given for the interest, and

  • (ii) if no consideration is given for the interest, 1, and

  E

  is the increase, if any, as a result of the disposition, in the paid-up capital in respect of the class of shares, computed without reference to this paragraph as it applies to the disposition;

• (d) any contribution of capital to a corporation or partnership in connection with the disposition is deemed, to the extent that it exceeds the amount determined under subparagraph (a)(i) in respect of the disposition, not to result in a contribution of capital for the purpose of applying paragraphs 53(1)(c) and (e) at or after the disposition time;

• (e) any contributed surplus of a corporation that arose in connection with the disposition is deemed, to the extent that it exceeds the amount determined under subparagraph (a)(i) in respect of the disposition, not to be contributed surplus for the purpose of applying subsection 84(1) at or after the disposition time; and

• (f) if the disposition time is before March 22, 2016,

  • (i) subparagraphs (ii) and (iii) and paragraphs (c) to (e) apply in respect of the disposition only if the disposition is after 1999 and at least one person whose life was insured under the policy before March 22, 2016 is alive on March 22, 2016,

  • (ii) in applying paragraphs (c) to (e) in respect of the disposition, a reference in those paragraphs to “the disposition time” is to be read as “the beginning of March 22, 2016”,

  • (iii) if at any time (referred to in this subparagraph as the conversion time) before March 22, 2016 the paid-up capital of a class of shares of the capital stock of a corporation was increased, the increase occurred as a result of any action by which the corporation converted any of its contributed surplus into paid-up capital in respect of the class of shares, the contributed surplus arose in connection with the disposition, and subsection 84(1) did not apply to deem the corporation to pay a dividend at the conversion time in respect of the increase, in computing the paid-up capital in respect of that class of shares after March 21, 2016, there shall be deducted the amount determined by the formula

    (A − B × A/D) × C/A

    where

    A

    is the increase, if any, as a result of the conversion, in the paid-up capital in respect of all the shares of the capital stock of the corporation, computed without reference to this paragraph as it applies to the disposition,

    B

    is the amount determined under subparagraph (a)(i) in respect of the disposition,

    C

    is the increase, if any, as a result of the conversion, in the paid-up capital in respect of the class of shares, computed without reference to this paragraph as it applies to the disposition, and

    D

    is the total amount of the corporation’s contributed surplus that arose in connection with the disposition, and

  • (iv) if any consideration given for the interest includes a share of the capital stock of a corporation, the share (or a share substituted for the share) is disposed of (referred to in this subparagraph as the share disposition) after March 21, 2016 by a taxpayer and subsection 84.1(1) applies in respect of the share disposition, then for the purposes of applying section 84.1, the adjusted cost base to the taxpayer of the share immediately before the share disposition is to be reduced by the amount determined by the formula

    (A − B x A/C)/D

    where

    A

    is the total of all amounts each of which is the fair market value at the disposition time of a share of that capital stock given as consideration for the interest,

    B

    is the greater of the amount determined under subparagraph 148(7)(a)(i) in respect of the disposition and the adjusted cost basis to the policyholder of the interest immediately before the disposition,

    C

    is the fair market value at the disposition time of the consideration, if any, given for the interest, and

    D

    is the total number of shares of that capital stock given as consideration for the interest.