5 May 2026 CALU Roundtable Q. 5, 2026-1089351C6 - Definition of Capital Dividend Account in Subsection 89(1)

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 multiple corporate beneficiaries under a life insurance policy and proceeds are paid in consequence of the death of a person insured, is each beneficiary's CDA addition for the receipt of their portion of death benefits reduced by the amounts calculated in subparagraphs (d)(v) and (d)(vi) for the whole policy?

Position: Yes.

Reasons: Each beneficiary of a life insurance policy must apply subparagraphs (d)(v) and (d)(vi) of the definition of capital dividend account in subsection 89(1) independently.

2026 CALU Roundtable – May 5, 2026

Question 5 – Definition of Capital Dividend Account in Subsection 89(1)

Background

In 2016, subparagraphs (d)(v) and (d)(vi) (herein referred to as the Reduction Provisions) were added to the definition of “capital dividend account” (CDA) in subsection 89(1)(footnote 1), that reduce the amount of the CDA inclusion arising from the receipt of life insurance proceeds by a private corporation in consequence of the death of an insured person. For deaths occurring after March 21, 2016, the Reduction Provisions apply where a life insurance policy was disposed of by a policyholder (other than a taxable Canadian corporation) to a corporation after 1999 and before March 22, 2016 where subsection 148(7) applied to the disposition.

In 2018-0745811C6 dated May 8, 2018, the CRA opined that where there are multiple corporate beneficiaries under a life insurance policy, the CDA inclusion for each beneficiary is reduced by the total of all amounts each of which is the adjusted cost basis (ACB) of a policyholder’s interest in the policy pursuant to subparagraph (d)(iii) of the CDA definition. In other words, the addition to each beneficiary’s CDA is reduced by the total ACB of the life insurance policy.

Based on the CRA view and the wording of the Reduction Provisions, it appears that a CDA reduction can also apply to each corporation that is a beneficiary of a policy that was previously transferred in the above circumstances. We believe this could lead to unintended and inappropriate results.

Consider the following example:

• Mr. X transferred a $2 million term-to-100 life insurance policy (the Policy) in January of 2015, to his 100% owned corporation (Holdco).
• Holdco owns 100% of the shares in two subsidiary corporations – Opco A and Opco B.
• The Policy’s fair market value (FMV) at the time of the transfer was $400,000 and this was the amount of the consideration paid in cash by Holdco to Mr. X.
• Immediately before the time of the transfer, the ACB of the Policy was $126,000 and the cash surrender value (CSV) of the Policy was nil.
• Since Mr. X and Holdco were not dealing at arm’s length at the time of the transfer, subsection 148(7), as it read in 2015, applied to the disposition. In this regard, Mr. X was deemed to receive proceeds of the disposition and Holdco was deemed to acquire the Policy for an amount equal to the CSV of the Policy (nil).
• Following the transfer, Opco A and Opco B are designated as beneficiaries under the Policy, entitling each of them to life insurance proceeds of $1 million upon the death of Mr. X.
• The Policy remained in effect from the time of issuance to the time of the death of Mr. X.
• Mr. X passes away in January 2026 and the life insurance proceeds were received by Opco A and Opco B in February 2026. The ACB of Holdco’s interest in the policy immediately before Mr. X’s death was $298,000.
• There were no changes to the issued shares or paid-up capital of any class of shares of the capital stock of Holdco at the time of the transfer of the Policy or during the period up to the death of Mr. X.

The total combined reductions to the capital dividend accounts of Opco A and Opco B by virtue of subparagraphs (d)(v) and (d)(vi) would appear to be $800,000, computed as follows:

									                  Opco A	Opco B
	Reduction under subparagraph (d)(v)
	FMV of the consideration given in respect of the
	disposition ($400,000) minus the greater of the:
	- CSV of the Policy at the time of transfer (nil); and
	- ACB of the Policy at the time of transfer ($126,000)		$274,000	$274,000

	Reduction under subparagraph (d)(vi)
	Amount by which the lesser of the:
	- FMV of the consideration given in respect of the
	disposition ($400,000)
	- ACB of the Policy at the time of transfer ($126,000)
	exceeds
	the CSV of the Policy at the time of transfer (nil), minus
	the absolute value of any negative ACB of the Policy
	immediately before death (nil)					    $126,000	$126,000

	Total								                $400,000	$400,000

The result in this specific example is a reduction to the total CDA inclusion with respect to the life insurance proceeds received by Opco A and Opco B, in consequence of Mr. X’s death, equal to twice the amount of the consideration Mr. X received from Holdco on the transfer of the Policy to Holdco.

Question

Can the CRA confirm whether the CDA calculations in the above example reflect its interpretation of subparagraphs (d)(v) and (d)(vi) where there is more than one corporate beneficiary under the life insurance policy.

CRA Response

The CDA of a private corporation is defined in subsection 89(1). Under paragraph (d) of that definition, a corporation includes in its CDA the amount by which the proceeds of a life insurance policy received in consequence of the death of a person exceed the total of all amounts described in subparagraphs (d)(iii) to (d)(vi).

Subparagraphs (d)(v) and (vi) of the CDA definition apply where all of the following conditions are met:

• the proceeds of the particular life insurance policy were received by a corporation in consequence of the death of a person after March 21, 2016,
• an interest in the policy was disposed of, after 1999 but before March 22, 2016, by a policyholder that was not a taxable Canadian corporation, and
• subsection 148(7) applied to the disposition (e.g., the interest was disposed of to any person with whom the policyholder was not dealing at arm's length).

Where these conditions are met, the amount otherwise included in the CDA of a corporation in consequence of a person’s death is reduced under subparagraph (d)(v). Generally, the reduction under clause (d)(v)(A) is the amount by which the FMV of the consideration given in respect of the disposition of the interest in the policy exceeded the greater of the value of the interest in the policy (generally, the CSV) and the ACB of the interest in the policy to the policyholder immediately before the disposition.

In addition, where the above conditions are met, another reduction to the CDA may be required by subparagraph (d)(vi) where, generally, the ACB of the interest in the policy to the policyholder immediately before the disposition exceeded the CSV of the interest in the policy at the time of the disposition.

It remains our view that, where there are multiple corporate beneficiaries designated under a life insurance policy, each beneficiary must apply paragraph (d) of the definition of CDA independently.

Accordingly, the CDA inclusion to each of Opco A and Opco B in the scenario described above would be computed as follows:

								Opco A		Opco B

	Addition under subparagraph(ii) – Proceeds received
	in consequence of the death of Mr. X 			$1,000,000	$1,000,000

	Reduction under subparagraph d(iii) – ACB of a
	policyholder’s (i.e. Holdco’s) interest in the Policy	($298,000)	($298,000)

	Reduction under subparagraph (d)(v) – per above		($274,000)	($274,000)

	Reduction under subparagraph (d)(vi) – per above	($126,000)	($126,000)

	CDA inclusion						       $302,000	$302,000

In contrast, if either Opco A or Opco B was the sole beneficiary of the $2 million Policy, the CDA inclusion would be $1,302,000.

Sylvie Danis
2026-108935
May 5, 2026

FOOTNOTES

Note to reader: Because of our system requirements, the footnotes contained in the original document are shown below instead:

1. Unless otherwise stated, all references to a statute are to the relevant provision of the Income Tax Act R.S.C. 1985 (5th Supp.), c.1, as amended, (the Act), or, where appropriate, the Income Tax Regulations, C.R.C., c.945, as amended, (the Regulations).