I created my LLC to take advantage of pass through taxation, however, my reason for subleasing is more to take advantage of liability protection. 

Guess it's better to find out now than realizing this problem when someone is suing :) This concern came up while I was discussing taxation and possible write-offs if using HELOC to fund purchases, which I was told is not allowed until after the property is producing income. 

Depending on your familiarity with Real Estate taxation, he has an intro book as well as an advanced book. 

Doing so would likely turn the policy into a modified endowment contract (MEC) and make the policy taxable, creating a double-taxation: once upon liquidating the retirement account, and again in the new policy because of the MEC limits.If the property in TN is an investment property, he could look at doing it the other way: liquidate -> buy rental property -> use net income to buy life insurance.

As part of the distribution of assets this falls under the corpus of the trust, and he's (the owner) is likely worried over taxation penalties upon sale.

The benefit is that while capital gain taxation is deferred it temporarily frees more money (profits/equity) for re-investing is this the point?

It helps avoid the big self-employment tax at end of the year really. 

Reduced (or free) rent is taxable income to the resident manager and reporting and related taxation can get tricky…

If you want to do a real deep dive into a property, though, I would use a calculator that references Canadian taxation and mortgage calculations.

Look inside your policy illustration for a section on taxation of life insurance contracts.