For the purpose of calculating its capital dividend account, is a corporation that is a beneficiary of a life insurance policy required to take into account the adjusted cost base of that policy to the other corporation that owns the policy? CRA responded:
The calculation of the adjusted cost basis of a life insurance policy is performed only for the policyholder. In this situation, the proceeds of a life insurance policy that are included in paragraph (d) of the capital dividend account of the corporation that is the beneficiary of the policy in subsection 89(1) are not reduced by the adjusted cost basis of the policy that was held by another corporation before the death of the insured.
CRA went on to state:
[S]ubsection 246(1) could apply on a case-by-case basis in a situation where the parent corporation that is the holder of a life insurance policy designates a subsidiary as the beneficiary.
…[T]he series of transactions described in your letter appear to be for the purpose of obtaining tax benefits and could be considered abusive for the purposes of subsection 245(4).