18 September 2025 CLHIA Roundtable Q. 5, 2025-1067951C6 - Term conversion – Capital Dividend Account

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: A corporate owned term life insurance is converted to a universal life (UL) policy in March 2020. The term policy was previously acquired by the corporation in 2010.

The UL policy is a new policy of the corporation for purposes of section 148 of the Act. What is the addition to the corporation’s CDA account on receipt of the death benefit.

Position: See response.

Reasons: The Legislation.

CLHIA CRA Roundtable – 2025

Question 5 – Term conversion – Capital Dividend Account

Background

In 2016, amendments were made to the definition of “capital dividend account” (CDA) in subsection 89(1) (endnote 1) with respect to a private corporation’s CDA inclusion relating to the proceeds of a life insurance policy received by the corporation in consequence of the death of any person after March 21, 2016. In this regard, under subparagraphs (d)(v) and (d)(vi) of the CDA definition where “an interest in the policy was disposed of by a policyholder… after 1999 and before March 22, 2016 and subsection 148(7) applied to the disposition…”, the amount otherwise added to the CDA of a private corporation in consequence of a person's death is reduced by, among other things,

• the amount by which the fair market value (FMV) of the consideration given in respect of the prior disposition exceeds the greater of the policy’s cash surrender value (CSV) and adjusted cost basis (ACB) immediately before the transfer (pursuant to subparagraph (d)(v) of the CDA definition); and
• the amount, if any, by which the lesser of (i) the ACB of the disposing policyholder’s interest in the policy immediately before the disposition and (ii) the FMV of the consideration given in respect of the policy exceeds the value (defined in subsection 148(9) to generally mean the CSV of the policy) of the interest in the policy at the time of the disposition, minus the absolute value of the negative amount, if any, that would be, in the absence of section 257, the ACB, immediately before the death, of the interest in the policy (pursuant to subparagraph (d)(vi) of the CDA definition).

Hypothetical example

Assume that P acquired a 20-year renewable and convertible term life insurance policy on P’s life in January 2000 (the “term policy”) that pays proceeds of $500,000 in consequence of P’s death. P was the 100% shareholder of PCo, a Canadian-controlled private corporation. On June 1, 2010, P transferred the term policy to PCo for $50,000, which represented the FMV of the policy at that time. At the time of transfer the term policy had an ACB and CSV of nil.

The transfer of the term policy resulted in a disposition of the policy to P. Pursuant to subsection 148(7) (as the provision then read), the proceeds of the disposition (PoD) was deemed to be nil and no taxable policy gain was reported by P in respect of the transfer. In addition, since the transfer took place for proceeds equal to the FMV of the policy, P was not required to report a shareholder benefit on the transfer.

On March 1, 2020, PCo exercised the conversion right under the term policy, converting the policy to a universal life (UL) policy (the “UL policy”) for the same face amount ($500,000) as the term policy. The UL policy received by PCo on the conversion was a new policy for purposes of section 148 and related regulations with a new policy number and an issue date of March 1, 2020. The UL policy was not a “LIA policy” or a “10/8 policy” as these terms are defined in subsection 248(1).

On February 1, 2025, P died and PCo wants to calculate the addition to the CDA in respect of the receipt of the life insurance proceeds of $500,000 under the UL policy. Immediately preceding P’s death, the policy’s ACB was $80,000 and its CSV was nil.

Questions

Can the CRA confirm that:

a) Subparagraphs (d)(v) or (d)(vi) of the CDA definition in subsection 89(1) do not apply in determining the addition to PCo’s CDA arising from the receipt of the proceeds under the UL policy.

b) The CDA addition arising from PCo’s receipt of the insurance proceeds under the UL policy will therefore be $420,000 ($500,000-$80,000).

CRA Response

The dispositions described in each of subparagraphs (d)(v) and (d)(vi) of the CDA definition are in respect of an interest in the life insurance policy under which the corporation received proceeds in consequence of the death of the insured in accordance with subparagraphs (d)(i) and (d)(ii) of the CDA definition.

In the hypothetical example described above, the proceeds were received by PCo in consequence of the death of P in accordance with the terms of the UL policy which was described as a new policy of PCo issued on March 1, 2020. Accordingly, in our view subparagraphs (d)(v) and (d)(vi) of the CDA definition would not apply to reduce the proceeds received pursuant to the UL policy by PCo in consequence of the death of P.

Accordingly, we agree that the addition to PCo's CDA with respect to the UL Policy will be $420,000 ($500,000-$80,000).

Alex Johnstone
2025-106795
September 18, 2025

ENDNOTES

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)