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By: Florence Marino B.A., LL.B., TEP | Vice President, Tax & Estate Planning

A recent CRA Roundtable response dealt with a transfer of a life insurance policy as a dividend-in-kind to a trust and then out to a corporate beneficiary of the trust.

2023 APFF Question 4

From an unofficial translation, the essence of this question is:

What are the tax consequences of the receipt by a family trust of a dividend-in-kind (where the in-kind property is a life insurance policy) and a distribution from the trust of the dividend-in-kind to a corporate beneficiary of the trust?

Other relevant facts include:

  • The trust (the X family trust) holds all the common shares of the corporation that pays the dividend (CoA).
  • CoA owns and is beneficiary of a life insurance policy on the life of its controlling shareholder, X.
  • The policy has a fair market value (FMV) of $250, a cash surrender value (CSV) of $150 and an adjusted cost basis (ACB) of $50.
  • CoA and the corporate beneficiary of the trust (CoX) are connected corporations.
  • CoX is a management company controlled by X and is a beneficiary of both the capital and the income of the trust.
  • There is sufficient safe income on hand attributable to the common shares of CoA held by the trust relative to the value of the dividend. (Note: the CRA announced a change in position to apply prospectively to calculations of safe income for taxation years beginning after November 28, 2023.
  • The impact, if any, of those changes was not considered in writing this article.) All the shares of CoA will be sold to an arm’s length third party the year following the payment of the dividend-in-kind and its distribution by the trust.
  • Subsection 75(2) doesn’t apply and never applied to the trust.

Dividend-in-kind of a policy without a trust

In a similar scenario, without a trust, if the payment of a dividend-in-kind is made from one corporation to a connected corporation, the dividend received by the recipient corporation would be a tax-free intercorporate dividend for the FMV of the policy. The policy would be disposed of by the transferor corporation on a non-arm’s length basis for no consideration. Subsection 148(7) provides that this would result in proceeds of the disposition of the policy being the greater of ACB, CSV and the FMV of consideration given by the recipient. Since a shareholder gives no consideration to receive a dividend, there would be no consideration given. See for history: Life insurance policy distributed as a dividend in kind to a shareholder ( and Policy as a dividend in kind – Ditto (

Using the values in the APFF question, if the recipient corporation directly received the dividend-in-kind, it would receive a tax-free intercorporate dividend of $250. The transferor corporation would have a disposition at CSV of $150 and a taxable policy gain of $100. The recipient corporation would have an ACB of $150 in the policy after the transfer.

Imperfect conduit

Interposing a trust between the transferor corporation and the recipient corporation, what happens? The trust is the recipient of a dividend of $250. The transferor corporation would have a disposition of the policy at the CSV of $150 and a taxable policy gain of $100. The trust would have an ACB in the policy of $150. Subsection 104(19) allows the character of the dividend to be flowed through to the beneficiary recipient corporation and deems the dividend so designated not to have been received by the trust. So far, the trust works as a conduit.

What about the transfer of the policy?

Which provision or provisions apply? The CRA appears to be suggesting that both 106(3) and 148(7) could apply and their response sees 106(3) as operative. However, they conclude that no matter which provision applies the end result would be the same.

Although a question of mixed fact and law, the CRA response worked from the premise that a policy received as a dividend-in-kind is generally on account of income and the trust pays this income in-kind on the transfer of the policy to CoX in full or partial satisfaction of its interest in the trust’s income. As such, it was the view of the CRA, that the trust is deemed to dispose of the property (i.e. the policy) for proceeds equal to its FMV (and would have income of $100).

In discussing the possible application of 148(7), when the policy is transferred to CoX from the trust the CRA view distinguishes this from the direct distribution of a policy as a dividend in-kind by a corporation to its shareholder. Instead of no consideration being given by the shareholder, as is the case under a direct distribution, the CRA sees CoX as giving consideration for the transfer. In their view, CoX has the right to demand payment from the trust of an amount equal to the FMV of the policy ($250) and it therefore gives consideration for the interest in the policy transferred. Under 148(7), this would result in $250 proceeds of disposition to the trust and a $100 policy gain.

The CRA therefore concludes whether 106(3) applies or 148(7) the end result is the same.

Reflecting this view in the ACB of the policy

Based on the CRA response the ACB to CoX should be $250. How does this get reflected in the ACB of the policy? Generally, where a policy is transferred the owner would file a form with the insurer. Insurers will ask: if the transfer is at arm’s length or not; whether consideration has been given and if so, how much; whether particular provisions of the Act are in play such as 88(1) or 107(2) etc. The trust would have to reflect this APFF response in some way when providing the insurer with the relevant information it needs to properly tax report in respect of the policy and maintain the ACB of the policy as a result of the transfer. Insurers would not intuitively know what’s happening.

Alternative approaches

Making the dividend received by the trust payable by way of a promissory note to CoX and in the next year transferring the policy to CoX wouldn’t change matters. In their response, CRA sees this as the repayment of a debt by the trust with a disposition of the policy pursuant to 148(7). The CRA sees consideration to be given by CoX corresponding to the amount of the debt repaid – the FMV of the promissory note of $250. This would result in a taxable policy gain to the trust for $100 with CoX acquiring the policy at a cost equal to $250.

As CoX in this question is a capital beneficiary of the trust, it may be possible to roll out the shares of CoA to CoX under 107(2) and then pay a dividend in-kind (of the policy) directly to CoX from CoA. This would yield the same tax result as the payment of a dividend in-kind of a policy directly between a corporation and a shareholder (which in this case is a connected corporation) as discussed above. However, a lot of other issues would need to be considered to ensure this would make sense. In the APFF question, CoA was going to be sold to a third party subsequent to the transfer of the policy so issues relating to safe income and the ability to use the lifetime capital gains exemption will likely surface.  


Trusts are not perfect conduits. This CRA commentary highlights an imperfect conduit circumstance.


This publication is protected by copyright. Tompkins Insurance is not engaged in rendering tax or legal advice. TOMPKINSights contains a general discussion of certain tax and legal developments and should not be construed as tax or legal advice.

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