8 October 2004 APFF Roundtable Q. 5, 2004-0089141C6 F - Compte de dividendes en capital

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89(1) Compte de dividendes en capital 148(9)

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This translation was prepared by Tax Interpretations Inc. The CRA did not issue this document in the language in which it now appears, and is not responsible for any errors in its translation that might impact a reader’s understanding of it or the position(s) taken therein. See also the general Disclaimer below.

8 October 2004 APFF Roundtable Q. 5, 2004-0089141C6 F - Compte de dividendes en capital

Principal Issues: [TaxInterpretations translation]

On the death of the insured, there is an outstanding policy loan which is deducted from the death benefit paid to the beneficiary of the life insurance policy. For the purposes of the CDA:

1. Is there a repayment of the advance immediately before death for the purposes of the definition of adjusted cost basis?

2. What is the amount received by the policy beneficiary following death for CDA purposes?

Position: 1.No.

2. The net amount paid by the insurer

Reasons: 1. The ACB is calculated immediately before death and at that time the policy loan is not repaid.

2. The amount that can be paid to the beneficiary is the sum insured minus the policy loans.

FINANCIAL SERVICES ROUNDTABLE
2004 APFF CONFERENCE

Question 5

Capital dividend account - policy loan

Paragraph (d) of the definition of "capital dividend account" in subsection 89(1) provides that the amount by which the proceeds of a life insurance policy received by a private corporation after May 23, 1985 as a consequence of the death of a person exceeds the adjusted cost basis ("ACB") (within the meaning assigned by subsection 148(9)) of the policy to the corporation immediately before the person’s death, is added to the corporation's capital dividend account (“CDA”).

For example, a corporate owner and beneficiary of a life insurance policy receives a death benefit in the amount of $850,000, less a policy loan of $150,000 ($1,000,000 - $150,000) in accordance with the terms of the life insurance policy. The facts are as follows:

Death benefit	$1,000,000
ACB without policy loan	$200,000
Policy loan	$150,000

The ACB immediately before death was equal to $50,000 ($200,000 - $150,000).

We believe that the amount added to the CDA will be $950,000 ($1,000,000 - $50,000).

Can CRA confirm our interpretation?

CRA Response

We confirm that the ACB of the life insurance policy for CDA purposes is $50,000. The reduction of the benefit payable at death by the amount of the policy loan at death is not a repayment of a policy loan described in Element E of the definition of ACB in subsection 148(9). This is because the calculation of the ACB for purposes of the CDA definition is made immediately before death. Furthermore, Element E of the ACB requires consideration of policy loans repaid prior to the time of the ACB calculation.

In general, where the terms of a life insurance policy provide that following the death of the insured, the beneficiary is entitled to receive as a death benefit an amount that is obtained after deducting the policy loan on death, we will consider the net amount received to be the proceeds of a life insurance policy for CDA purposes.

Consequently, in the example shown above, the amount to be included in the CDA will be $800,000, which is the proceeds of the life insurance policy ($850,000) received by the corporation as a result of the insured's death less the ACB of that policy to the corporation ($50,000) immediately before death.

October 8, 2004
2004-008914

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Text of Severed Letter

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.

Principales Questions:

Au décès de l'assuré, il y a une avance sur police impayée qui est déduite de la prestation décès payée au bénéficiaire de la police d'assurance-vie. Aux fins du CDC :

1. Est-ce qu'il y a un remboursement de l'avance immédiatement avant le décès pour les fins de la définition du coût de base rajusté?

2. Quel est le montant reçu par le bénéficiaire de la police suite au décès pour les fins du CDC?

Position Adoptée: 1.Non.

2. Le montant net versé par l'assureur

Raisons: 1. Le calcul du CBR est effectué immédiatement avant le décès et à ce moment, l'avance sur police n'est pas remboursée.

2. Le montant qui peut être versé au bénéficiaire est le capital assuré moins les avances sur police.

TABLE RONDE SERVICES FINANCIERS
APFF - CONGRÈS 2004

Question 5

Compte de dividendes en capital - avance sur police

Le paragraphe d) de la définition du terme " compte de dividendes en capital " au paragraphe 89(1) L.I.R. prévoit que l'excédent du produit d'une police d'assurance-vie qu'une société privée reçoit après le 23 mai 1985 par suite du décès d'une personne sur le coût de base rajusté (ci-après " CBR ") (au sens du paragraphe 148(9) L.I.R.) de la police pour la société immédiatement avant le décès de la personne, s'ajoute au compte de dividendes en capital (ci-après " CDC ") de la société.

Par exemple, une société, titulaire et bénéficiaire d'une police d'assurance-vie reçoit une prestation payable au décès pour un montant de 850 000 $, déduction faite d'une avance sur police de 150 000 $ (1 000 000 $ - 150 000 $) et ce, conformément aux modalités de cette police d'assurance-vie. Les faits se résument comme suit :

Capital décès	            		1 000 000 $
CBR sans avance sur police			   200 000
Avance sur police					   150 000

Le CBR immédiatement avant le décès est égal à 50 000 $ (200 000 $ - 150 000 $).

Nous croyons que le montant ajouté au CDC sera 950 000 $ (1 000 000 $ - 50 000 $).

L'ARC peut-elle confirmer notre interprétation?

Réponse de l'ARC

Nous confirmons que le CBR de la police d'assurance-vie aux fins du calcul de CDC est 50 000 $. La réduction de la prestation payable au décès du montant de l'avance sur police au moment du décès ne constitue pas un remboursement d'une avance sur police visée à l'élément E de la définition de CBR au paragraphe 148(9) L.I.R. En effet, le calcul du CBR aux fins de la définition du CDC est effectué immédiatement avant le décès. Par ailleurs, l'élément E du CBR requiert de tenir compte des avances sur police remboursées avant le moment du calcul du CBR.

En général, lorsque les modalités d'une police d'assurance-vie prévoient que suite au décès de l'assuré, le bénéficiaire a le droit de recevoir à titre de prestation au décès un montant qui est obtenu après déduction de l'avance sur police au décès, nous considérerons que c'est le montant net reçu qui constitue le produit d'une police d'assurance-vie aux fins du calcul du CDC.

Par conséquent, dans l'exemple illustré ci-dessus, le montant à inclure dans le CDC sera 800 000 $, soit le produit de la police d'assurance-vie (850 000 $) que la société a reçu par suite du décès de l'assuré moins le CBR de cette police pour la société (50 000 $) immédiatement avant le décès.

Le 8 octobre 2004
2004-008914

Summaries

Summary Under

Tax Topics - Income Tax Act - Section 148 - Subsection 148(9) - Adjusted Cost Basis - Element E

ACB of policy immediately before death reduced by policy loan

A corporate owner and beneficiary of a life insurance policy receives a death benefit in the amount of $850,000, less a policy loan of $150,000 ($1,000,000 - $150,000) in accordance with the terms of the life insurance policy. Regarding the ACB immediately before death, CRA stated:

[T]he ACB of the life insurance policy for CDA purposes is $50,000. The reduction of the benefit payable at death by the amount of the policy loan at death is not a repayment of a policy loan described in Element E of the definition of ACB in subsection 148(9). This is because the calculation of the ACB for purposes of the CDA definition is made immediately before death. Furthermore, Element E of the ACB requires consideration of policy loans repaid prior to the time of the ACB calculation.

Summary Under

Tax Topics - Income Tax Act - Section 89 - Subsection 89(1) - Capital Dividend Account - Paragraph (d)

amount net of policy loan added to CDA

A corporate owner and beneficiary of a life insurance policy receives a death benefit in the amount of $850,000, less a policy loan of $150,000 ($1,000,000 - $150,000) in accordance with the terms of the life insurance policy. After finding that the ACB immediately before death, was $50,000 ($200,000 - $150,000), CRA stated:

In general, where the terms of a life insurance policy provide that following the death of the insured, the beneficiary is entitled to receive as a death benefit an amount that is obtained after deducting the policy loan on death, we will consider the net amount received to be the proceeds of a life insurance policy for CDA purposes.

Consequently … the amount to be included in the CDA will be $800,000, which is the proceeds of the life insurance policy ($850,000) received by the corporation as a result of the insured's death less the ACB of that policy to the corporation ($50,000) immediately before death.

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8 October 2004 APFF Roundtable Q. 5, 2004-0089141C6 F - Compte de dividendes en capital

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