2017-0690311C6 CLHIA 2017 - Q1 CDA

Principal Issues: Where there are two corporate beneficiaries, each designated for 50% of the death benefit under a life insurance policy held by a third corporation, will the increase to the capital dividend account be reduced by the full adjusted cost basis of the policyholder’s interest in the policy for each beneficiary?

Position: Yes.

Reasons: Paragraph (d) of the definition of "capital dividend account" in subsection 89(1).

Author: Danis, Sylvie
Section: 89(1)

CLHIA CRA Roundtable – May 2017

Question 1 – Capital Dividend Account

Background  

Paragraph (d) of the definition of capital dividend account (CDA) in subsection 89(1) of the Act was amended in 2016 by Bill C-29 (enacted December 15, 2016) to generally provide for an addition to the CDA of a corporation equal to the amount by which the proceeds of a life insurance policy of which a corporation was a beneficiary in consequence of the death of any person after March 21, 2016, exceed the adjusted cost basis (ACB) immediately before the death, of a policyholder’s interest in the policy.

Scenario

Assume the following fact situation: Corporation A is the sole owner and premium payor for a life insurance policy with a death benefit of $1 million on the life of Mr. A.  Corporation B and Corporation C are each designated as beneficiaries for 50% of the death benefit under this policy.  Mr. A dies after March 21, 2016 at a time when the ACB of the policy to Corporation A is $200,000.

Question

Can the CRA please confirm that the amount added to the CDA of each of Corporation B and Corporation C is $400,000?

CRA Response

As amended by Bill C-29, paragraph (d) of the definition of CDA in subsection 89(1) of the Act includes in a corporation’s CDA the amount by which the proceeds of a life insurance policy received as a consequence of the death of a person (death benefit) exceed the total of all amounts described in subparagraphs (d)(iii) to (vi). For deaths occurring after March 21, 2016, subparagraph (d)(iii) refers to the ACB, immediately before the death, of a policyholder’s interest in the life insurance policy (regardless of whether the recipient of the death benefit is a policyholder of the policy).

Where there are multiple corporate beneficiaries designated under a policy, it is our view that each beneficiary must apply paragraph (d) of the definition of CDA independently. That is, for the purposes of determining the addition to each beneficiary’s CDA, the portion of the death benefit received by each beneficiary must be reduced by the full ACB of a policyholder’s interest in the policy. The wording of subparagraph (d)(iii) does not provide for a proration of the ACB in cases of multiple corporate beneficiaries.

In the scenario provided above, the net addition to the CDA of each of Corporation B and Corporation C with respect to the death benefit is $300,000 ($500,000 received by each beneficiary as a consequence of Mr. A’s death reduced by the ACB of the policy to Corporation A of $200,000).

Sylvie Danis
2017-069031
May 18, 2017

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