2020-0842151C6 CALU 2020 - Q3- Insurance Proceeds & CDA

Principal Issues: Whether the "fund value" portion of a payment made under an exempt single-life life insurance policy by an insurer to a corporation as a consequence of the death of the life insured under the policy is "proceeds of life insurance" for purposes of subparagraph (d)(ii) of the definition of capital dividend account in subsection 89(1).

Position: It is always a question of fact whether a payment under any particular life insurance contract is "proceeds of a life insurance policy" which can only be determined by examining the facts of the particular situation. In a particular fact situation where the "fund value" reflects the balance of the investment accounts within an exempt single-life life insurance policy, the "fund value" would generally be considered to be proceeds of life insurance for purposes of subparagraph (d)(ii) of the definition of capital dividend account in subsection 89(1).

Reasons: The phrase "proceeds of a life insurance policy" is not defined in the Act. The investment account value under an exempt life insurance policy is a component of the policy that is considered within the scope of the exempt policy rules in section 306 of the Regulations, as is the case for the face value portion of the policy. The scheme of these rules generally provide for the taxation of amounts received by a policyholder out of the policy prior to the death of the life insured under the policy, but on a tax-free basis where they are paid out as a consequence of the death of the life insured.

Author: Campbell, Alison
Section: "capital dividend account" defn in ss. 89(1); s. 148; ss. 248(1), Reg. 306, Reg.1401(3)

2020 CALU CRA Roundtable – July 2020

Question 3 - Proceeds of an Insurance Policy and Calculation of the CDA credit

Background

One of the death benefit patterns permitted under a Universal Life (UL) policy is often referred to as “face amount plus fund value”. Under this death benefit pattern, upon the death of the life insured, an amount equal to the fund value of the policy is added to the initial face amount. The fund value is the accumulated balance of the investment accounts within the policy at the time of the death of the life insured.

Consider the following example:

*    In 1990, Opco purchased an exempt UL policy under which the defined death benefit was “face amount plus fund value”.
*    Opco has always been the owner, premium payer and beneficiary under the policy.
*    The policy is a single-life policy on the life of Opco’s shareholder A with a face amount of $200,000.
*    The policy was not an LIA policy as defined in subsection 248(1).
*    In 2019, shareholder A died and at the time of the death the policy had a fund value of $20,000.
*    Following shareholder A’s death, the insurer paid to Opco the $220,000 total of the face amount of the policy plus the fund value amount at the time of shareholder A’s death.

Question

Can the CRA confirm that in the example described above the “proceeds of a life insurance policy” to Opco for purposes of subparagraph (d)(ii) of the capital dividend account definition in subsection 89(1) would be equal to the full $220,000 death benefit received by Opco from the policy?

CRA Response

As stated in our response to question 2, given that each life insurance policy is a contract with terms that can vary, whether or not a payment under a particular life insurance policy would be proceeds of a life insurance policy in consequence of death is a question of fact which can only be determined upon the review of a particular life insurance policy. Accordingly, a review of the facts including the terms and conditions of the life insurance policy would be required to determine the nature of a particular amount received.

In the fact pattern described above, the particular payment made by the insurer to Opco was for two amounts. The first was the face amount of the policy and the second was the balance in the investment account that had accumulated within the exempt single-life policy up to the time of the death of the life insured. In this fact pattern, it is our view that the total of these two amounts would be “proceeds of a life insurance policy” for purposes of subparagraph (d)(ii) of the definition of “capital dividend account” in subsection 89(1) of the Act.

Alison M. Campbell
July 8, 2020
2020-084215

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