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: In the context of creditor's group life insurance policies, whether the death benefit added to the corporate debtor's capital dividend account is reduced by any adjusted cost basis?
Position: In circumstances involving this particular type of "pure" insurance product, the CRA is prepared to accept that the full amount of the death benefit be added to the corporate debtor's capital dividend account, without a reduction by the adjusted cost basis.
Reasons: Characteristics of the type of product described.
March 25, 2013
Re : Creditor's Group Life Insurance, Capital Dividend Account and Adjusted Cost Basis
We are writing in response to your email of May 10, 2012 wherein you requested our comments following the Federal Court of Appeal decision in The Queen v. Innovative Installation Inc. (2010 FCA 285) ("Innovative").
More specifically, you have asked us whether, in the context of creditor's group life insurance policies, the full amount of the death benefit is added to the corporate debtor's capital dividend account ("CDA"). In other words, you have asked us to confirm that in these situations, the corporate debtor's CDA is not reduced by any adjusted cost basis ("ACB") where the corporate debtor, as certificate holder, has paid the cost of the premiums to the creditor.
The CRA has previously indicated that the Federal Court of Appeal decision in Innovative will be followed in fact situations that are similar or identical to those at issue in this case. This case involved a creditor's group life insurance policy where the creditor (a financial institution) was both the policyholder and the beneficiary under the policy. On the death of the life insured, the creditor applied the life insurance proceeds against the corporate debtor's loan as it was contractually obligated to do.
It is our understanding that creditor's group life insurance products are generally "pure" insurance products, in that they are generally term and non-participating insurance products with no cash surrender value, typically designed to pay the outstanding balance of a loan upon death of the life insured. Moreover, it is our understanding that premiums payable with respect to a particular debtor for this type of products are generally calculated to cover the cost of insurance over the term of the certificate, that is, the term of the loan. It is therefore our understanding that if an ACB calculation was effected with respect to each particular certificate holder, the result would generally be a very low figure, if not nil.
In such circumstances, the CRA is prepared to accept that the full amount of the death benefit be added to the corporate debtor's CDA, without a reduction by the ACB. However, our reasoning is based on the characteristics of the type of product described above. Therefore, this position would not apply in the context of a different type of insurance product.
Louise J. Roy, CPA, CGA
Financial Industries and Trusts Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory
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