20 April 1982 Income Tax 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.

D.E. Holtz (613) 593-6937

April 20, 1982

Dear Sirs:

Re: Adjusted Cost Base of Life Insurance Policies

This is in reply to your letter of March 11, 1982 concerning the calculation of the adjusted cost base (A.C.B.) of a life insurance policy when policy dividends are used to pay premiums under the policy.

Generally, premiums paid are added to the ACB of the policy and policy dividends (proceeds of disposition) reduce the ACB. In your letter, you used the following data as an example:

- face value of the policy is $1,000,000 - premiums are $2000 per year; and are paid for 8 years - for the next 20 years policy dividends are used to pay the yearly premiums. - the insured dies at the end of 29 years. Also assume - the policy was taken out after 1978 - no policy dividends were paid during the first 8 years - policy dividends in the following 20 years were $2000 per year.

A.C.B. of policy (paragraph 148(9) (a)

Premiums paid: 28 years @ $2000              $56,000
Dividends credited: 20 years @ $2000          40,000
A.C.B.                                       $16,000
Capital Dividend Account Adjustment (subparagraph 89 (1) (b) (iv)

Proceeds on death                              $1,000,000
A.C.B.                                          16,000
Addition to the Capital Dividend account        948,000

It should be noted, that this is a simplified example and the calculation of the A.C.B. of a life insurance policy may be somewhat more complex in specific situations.

Yours truly,

for Director Specialty Corporations Rulings Division Corporate Rulings Directorate