Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA. Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.
Principal Issues: Where there are two corporate beneficiaries and two joint owners in a life insurance policy, will the addition to each corporation’s capital dividend account be reduced by the total adjusted cost basis of the policy when the policyholders’ interests are reflected by ownership as tenants in common?
Reasons: Paragraph (d) of the definition of "capital dividend account" in subsection 89(1).
Author: Danis, Sylvie
CALU Roundtable - May 2018
Question 2 - CDA Credit - Corporate joint/co-ownership of insurance
The CRA has commented previously (# 2017-0690311C6 dated May 18, 2017 CLHIA Roundtable Q1) that where the beneficiary corporations are different from the owner of the policy, clause (d)(iii)(B) of the definition of “capital dividend account” in subsection 89(1) would reduce the CDA inclusion to each beneficiary corporation by the total “adjusted cost basis” (ACB) of the policy.
Consider the following fact pattern:
* Opco is owned 50/50 by Holdco A and Holdco B.
* Mr A holds 100% of the shares of Holdco A; Mr. B holds 100% of the shares of Holdco B.
* Holdco A and Opco jointly own an exempt life insurance policy on the life of Mr. A (Policy A).
* Holdco B and Opco jointly own an exempt life insurance policy on the life of Mr. B (Policy B).
* Opco requires $1 million of death benefit coverage under each policy in order to redeem the shares of Holdco A or Holdco B on the death of Mr. A or Mr. B, respectively.
* Opco pays the premium relating to $1 million of death benefit coverage in each case.
* Holdco A and Holdco B make additional deposits on an annual basis into the respective policies under which they are joint owners.
* The beneficiary designation in respect of each policy names Opco as the beneficiary for $1 million, and to the extent that there is any excess death benefit under each policy, the beneficiaries are Holdco A with respect to Policy A and Holdco B with respect to Policy B.
* Mr. A dies. At the time of death, the total death benefit to be paid under Policy A is $1.2 million and the ACB of Policy A is $150,000.
What will be the addition to Opco’s and Holdco A’s CDA with respect to the total death benefit paid under Policy A? Will the addition to the CDA to each corporation be reduced by the total ACB of all of the policyholders’ interests in the life insurance policy even where their respective interests are reflected by ownership in the policy as tenants in common?
Paragraph (d) of the definition of “capital dividend account” (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 an insured person (death benefit) exceeds 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 of a policyholder’s interest in the life insurance policy immediately before the death (regardless of whether the recipient of the death benefit is a policyholder of the policy).
As we noted in 2017-0690311C6, 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. 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 total of all amounts each of which is a policyholder’s ACB. In other words, the addition to each beneficiary’s CDA should be reduced by the total ACB of the life insurance policy.
In the scenario described above, the addition to the CDA of Holdco A with respect to the death benefit would be $50,000 ($200,000 death benefit received by Holdco A reduced by the total ACB of the policy which is $150,000). The addition to the CDA of Opco with respect to the death benefit is $850,000 ($1,000,000 death benefit received by Opco reduced by the total ACB of the policy which is $150,000).
May 8, 2018
All rights reserved. Permission is granted to electronically copy and to print in hard copy for internal use only. No part of this information may be reproduced, modified, transmitted or redistributed in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, or stored in a retrieval system for any purpose other than noted above (including sales), without the prior written permission of Canada Revenue Agency, Ottawa, Ontario K1A 0L5.
© Her Majesty the Queen in Right of Canada, 2018
Tous droits réservés. Il est permis de copier sous forme électronique ou d'imprimer pour un usage interne seulement. Toutefois, il est interdit de reproduire, de modifier, de transmettre ou de redistributer de l'information, sous quelque forme ou par quelque moyen que ce soit, de facon électronique, méchanique, photocopies ou autre, ou par stockage dans des systèmes d'extraction ou pour tout usage autre que ceux susmentionnés (incluant pour fin commerciale), sans l'autorisation écrite préalable de l'Agence du revenu du Canada, Ottawa, Ontario K1A 0L5.
© Sa Majesté la Reine du Chef du Canada, 2018